Financial watchdog to reinstate ban on short selling through next June

Korea's financial authorities will ban short selling from Monday through next June to crack down on illegal short sales and improve the system, said the Financial Services Commission (FSC) on Sunday.

Financial Supervisory Service (FSS) Gov. Lee Bok-hyun speaks at a press briefing to ban short selling practice at the Central Government Complex in Jongno District, central Seoul, on Sunday. [YONHAP

Korea's financial authorities will ban short selling from Monday through next June to crack down on illegal short sales and improve the system, said the Financial Services Commission (FSC) on Sunday.

The ban reinstates the curbs lifted in May 2021 on large-cap stocks after the practice was temporarily banned following the pandemic outbreak in 2020. The decision Sunday marks the fourth time the practice has been prohibited in Korea.

“Despite attempts to reform the system, the FSC found that foreign institutions and investors repetitively conducted naked short sales and raised concerns regarding the formation of fair prices within the domestic stock market,” the FSC said.

The financial regulator reported on Oct. 15 that it uncovered large-scale naked short sales by two global investment banks, reportedly HSBC and BNP Paribas, between 2021 and 2022. They will be imposed the heaviest penalty possible, according to the Financial Supervisory Service (FSS) last month.

Naked short selling, the practice of short selling a tradable asset without first borrowing the asset, is illegal in Korea.

The FSC is probing institutional investors that may have conducted illegal short selling, unlike prior investigations where the regulator focused only on specific stocks that were illegally short-sold.

The FSC says the eight-month period will become a grace period for the regulator to monitor related policies and probe further to root out illegalities.

The regulators also vowed to improve the short-selling system amid growing market volatility caused by high interest rates and geopolitical risks.

“Efforts to improve policies, such as extending the repayment period and reducing collateral requirements for large stock loans, have led to significant reductions in differences between the lending and borrowing services,” the FSS said.

“However, conditions are still not equal between individuals and institutions due to remaining disparities, and we will actively consider ways to address this issue fundamentally.”

The FSS will also form a special investigation team consisting of 20 people, including IT experts, which will launch a probe from Monday into global investment banks to monitor illegal short sales.

The financial watchdog also plans to closely cooperate with the National Assembly to come up with bills that enforce stronger criminal punishment against such illegalities.

“The foremost goal of the capital market is to create a fair and efficient market environment to protect the investors and build trust in the market,” said FSC Chairman Kim Joo-hyun. “The government will make every effort to ensure that the practice of short selling becomes a trusted policy for all investors.”

Retail investors criticize short selling as one of the critical reasons for the weak stock market.

More than 50,000 people signed a petition on the website of the National Assembly from Oct. 4 through Oct. 12, demanding improvements in the short-selling system to raise the stability and fairness of the securities market.

The petition has been submitted to the parliamentary committee for national policy for review.

The petitioners said securities systems should fundamentally make it impossible to borrow stocks and also demanded the regulators limit the redemption period for the stocks shorted by institutional and foreign investors.

Currently, there is no time limit on when they redeem the stocks, which makes it impossible for them to incur a loss if they wait until stock prices fall, according to the petitioners.

Short selling was temporarily prohibited domestically from March 2020 to May 2021, when the market melted in the aftermath of the Covid-19 pandemic.

BY LEE JAE-LIM [lee.jaelim@joongang.co.kr]