By May, new rules will be in place to guard against illegal short selling, prevent abuse by market makers, and increase retail investor access to short-selling opportunities.
South Korea’s FSC (Financial Services Commission) has announced a decision to extend the short-selling ban until 2 May 2021, and to allow a partial resumption of short-selling from 3 May on KOSPI 200 and KOSDAQ 150 stocks.
Korea’s short-selling ban, imposed for six months in March 2020 and later extended, has been due to expire on 15 March 2021. The FSC had said in November that it would lift the ban as scheduled, but it has since come under pressure to keep the ban in place.
On Wednesday (3 February), the FSC said 3 May partial resumption of short-selling is expected to have a limited impact on markets and stock prices, as KOSPI 200 and KOSDAQ 150 stocks have large market caps and liquidity. The short-selling ban will remain in place for more than 2,000 other stocks for the time being.
The FSC will continue to work on measures to improve the short-selling rules ahead of the partial resumption. In particular, a revised Financial Investment Services and Capital Markets Act is scheduled to take effect on 6 April 2020, allowing for stronger penalties to be imposed for illegal short-selling activities such as naked short-selling.
Under the revisions, illegal short-selling will be punishable with a fine up to the amount of the maximum short orders and one year or more of imprisonment. In addition, short-sellers will be required to keep their securities lending data for five years and securities firms will be required to tighten monitoring of illegal short-selling activities.
The 3 May resumption date was decided to allow KRX (Korea Exchange) sufficient time to make system changes and strengthen its oversight function. This will include the launch of a special team tasked with monitoring illegal short-selling activities.
KRX will increase the frequency at which it checks for naked short-selling from once every six months to every month. In addition, a new monitoring system will be launched to detect suspicious activities in real-time.
From 16 March, new rules for market makers will also take effect, prohibiting them from short-selling mini-KOSPI 200 futures and options and restricting their market making function to high-liquidity stocks. Under the rules, market makers will also be subject to more stringent disclosure rules to help improve transparency.
The FSC is also expanding the securities lending system to retail investors, who have not traditionally had equal access to short-selling compared to institutional and foreign investors. From 3 May, brokerage firms in Korea will make between KRW 2 trillion and KRW 3 trillion in stock available for securities lending to retail investors, with more to be made in future.
The FSC will additionally work to improve credit exposure rules for brokerage firms in order to prevent current limits (set at 100 percent of equity capital) from constraining securities lending to retail investors.
Retail investors will be required to undergo a pre-investment education programme and a mock investment trial before they can participate in short-selling, to ensure they understand the risks and processes involved in short-selling.
In addition, a KRW 30 million cap on short-selling orders will be imposed on beginner retail investors. Those with some experience will have a KRW 70 million cap, while professional investors and those with more than two years of short-selling experience will have no investment cap.