Yoon urges fundamental short selling reforms following temporary ban

[Photo by Lee Seung-hwan]

South Korean President Yoon Suk Yeol called for fundamental measures to improve short selling, putting pressure on financial authorities and lawmakers from the ruling party to come up with related legislation after a ban on short selling was imposed during the previous week.

During a cabinet meeting presided over by the president on Tuesday, Yoon emphasized that the recent short-selling ban is a measure to correct unfair market practices as well as protect both the market and investors, indicating that it is not a political attempt to earn votes ahead of the upcoming general election in April 2024.

“The Korean stock market is highly volatile and has a significant proportion of individual investors. Allowing illegal short selling to continue not only makes it difficult to establish fair pricing, causing significant losses to individual investors, but also undermines trust in the securities market and leads to investor exits,” Yoon said.

He also addressed the administration’s willingness to fundamentally improve the situation. “Short selling will be banned until fundamental improvement measures are developed,” he said, adding that he and his administration believe that the ban “will have a positive impact on the long-term competitiveness” of the Korean securities market.

Yoon’s comment, where he stated that leaving the issue of illegal short selling unresolved could worsen market confidence, is seemingly responding to concerns about the ban, such as the potential exit of foreign capital or potential inclusion in Morgan Stanley Capital International’s Developed Market Indexes. The Financial Services Commission (FSC) had already shown a somewhat cautious attitude toward a complete ban on short selling earlier, firmly stating the ban would be lifted after June 2024. This timeline may be prolonged now following the president’s calls for “fundamental” measures. A senior official from the financial authorities, however, said there is a possibility to resume short selling even before June “if institutional improvements are made.”

Yoon specifically urged the roles and responsibilities of the financial authorities in the matter. “We hope that the FSC and the Financial Supervisory Service thoroughly prepare solutions to correct the tilted playing field in our securities market and protect individual investors,” he said.

Following the president’s remarks, the market showed rebounds on Tuesday, as it did on the first day of the complete short selling ban on November 6. The Kospi closed at 2,433.25, up 1.23 percent from the previous day, and the Kosdaq closed at 794.19, up 2.55 percent. The rebounds marked a halt to the downward trend that had persisted since the sharp rebound on November 6, although the improved investor sentiment related to secondary battery stocks could have played a role, following Tesla Inc. stocks’ 4.22 percent increase in the New York stock market the day before.