Short-selling ban extended to next March

The ban on short selling has been extended until the expected date of completion for the monitoring system, with policy revisions also forthcoming.

People Power Party floor leader Choo Kyung-ho, center, speaks during a policy consultation meeting with the government held at the National Assembly in western Seoul on Thursday. [NEWS1]

The current ban on stock short selling has been extended through March of next year.

The short-selling system will undergo a major overhaul as well, with the borrowing period for shorted stocks limited to a maximum of 12 months, in order to “level the playing field” between institutional and retail investors according to the financial authorities.

The Financial Services Commission (FSC) decided on Thursday to extend the temporary ban on short selling, which was first implemented in November of last year, to the end of March next year.

The March target date is set to align with the scheduled completion of the forthcoming Naked Short Selling Detecting System (NSDS), which is designed to detect any illegal short trading by institutional investors. The government announced on Monday that the NSDS, which is currently under development by the Financial Supervisory Service (FSS) and the country’s bourse operator, the Korea Exchange, would take at least 10 months to be fully operational.

"If short selling is reinstated without the monitoring system, there is a risk that large-scale illegal short selling may occur again," said the FSC.

The suspension was initially scheduled to last until June, but President Yoon Suk Yeol said in January that “the ban on short trading will remain in place until there is a digital system that can fully prevent any side effects caused by illegal short trading."

The decision by the FSC was announced after the People Power Party (PPP), aligned with the president, and the government agreed to the latest extension during a policy consultation meeting. The meeting was attended by officials from the financial authorities including FSC Chairman Kim Joo-hyun and the FSS Gov. Lee Bok-hyun, as well as Korea Exchange CEO Jeong Eun-bo.

Naked short selling, an illegal practice in Korea, is shorting stocks without first borrowing them. The government implemented a temporary ban on short selling in November, which was initially set to last until June, after uncovering illegal short sale cases by global investment banks.

The revision plan, outlined by the FSC and FSS on Thursday, will mandate that institutional investors, responsible for over 92 percent of short-selling activities in the Korean market, set up a balance management system to detect and prevent any naked short trading in real time. Institutional investors will also be obligated to establish an internal control standard to prevent naked short selling.

Moreover, the government will revise short-selling rules applied to institutional investors to align with those applied to retail investors.

With the revision, the repayment period for stocks borrowed for shorting can be extended every 90 days up to four times, which limits the maximum borrowing period to 12 months for institutional investors. The current system does not limit the borrowing period for institutional investors, which has been criticized by retail investors for creating an unfair market environment.

The financial authorities will also bolster penalties against illegal short selling, upping the fine from the current three to five times the amount of illegal gains to four to six times. The traders may even face life in prison if the amount of illegal gains exceeds 5 billion won ($3.6 million).

"The principle is that the market should be operated fairly and transparently, and we also believe that the short-selling rules need to be aligned with global standards," said PPP floor leader Choo Kyung-ho during the meeting.

"A reasonable resolution to improve the system that can be trusted by institutions, retail investors and foreign investors should be devised."

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]