Korean regulators have been working to enhance protection measures for retail investors ahead of the partial resumption of short-selling on Monday.
South Korea’s FSC (Financial Services Commission) has reportedly warned that it will take stern actions against illegal activities involving stock short selling.
On Monday (3 May), the regulator partially lifted restrictions on short selling after a 14-month ban that began in March 2020. The FSC announced the decision to partially resume short selling in February.
In recent months, Korean regulators have been working to enhance protection measures for retail investors, who have long demanded a level playing field with institutional and foreign investors.
The key measures have included:
- stronger sanctions and criminal penalties on naked short selling and other illegal short sale activities
- establishment of a new system and special team to monitor for illegal short selling
- improvements to the securities lending system to improve access to short-selling opportunities for retail investors
- new rules for market makers to restrict them to only high-liquidity stocks and enhance their disclosure requirements
- requirements for retail investors to undergo a pre-investment education programme and mock investment trial prior before they can participate in short-selling
- a KRW 30 million cap on short-selling orders from beginner retail investors; and KRW 70 million for those with just some experience
- restrictions on subscriptions to new shares in a company if an investor has shorted the company’s stock after a capital raising plan is announced, until the determination of the issue price
- requirement for investors to keep records on and report short sale activities beyond a certain threshold to the FSC and KRX
Korea Financial Investment Association says more than 13,000 retail investors completed the pre-investment education programme, as of Friday (30 April). About 5,000 investors have also tried mock dealing.
According to FSC Vice Chairman Doh Kyu-sang, with the resumption of short selling, stock market movements will be closely monitored and any illegal moves will be handled with “stern actions”.
“The government will actively respond to market-disturbing activities, including illegal naked short selling, by imposing punishment that can be applied to the fullest extent of the law,” Doh said.
Under recent changes to Korean law, naked short sellers can face a prison term of one year or more, or a fine of up to 100 percent of the order amount, plus three to five times illegal profits gained.
On Monday, short selling was resumed only for KOSPI 200 and KOSDAQ 150 stocks. The KOSPI and KOSDAQ fell 0.66% and 2.2%, respectively. Biopharma stocks were said to be the most affected from the resumption of short selling.
The total value of short-selling transactions came to KRW 1.09 trillion (USD 971 million), 87 percent of which was from foreign investors.