Korea's short selling ban extended to March 2025

Top officials from South Korea's financial regulatory bodies and the ruling People Power Party hold a meeting to discuss measures to improve the short selling system at the National Assembly on Thursday. (Yonhap)

South Korea's ban on the short selling of stocks is set to be extended until March next year.

The projected deadline was discussed during a government-parliament meeting between the country's top financial regulators and the ruling People Power Party on Thursday to discuss the enhancement of short selling regulations.

"We have proposed extending the short selling ban until March 2025, after the development of the computerized monitoring system," said lawmaker Jeong Jeom-sig, chief policymaker of the ruling People Power Party, in a briefing following the meeting attended by officials from financial regulatory bodies, including the Financial Services Commission, Financial Supervisory Service and Korea Exchange.

Short selling involves borrowing and selling stocks expected to decline in price, aiming to repurchase them at a lower price to profit from the difference. Naked short selling, where stocks are shorted without borrowing or confirming their availability, is illegal in Korea.

The current complete ban on short selling, initially scheduled to expire this month, was implemented in November to enhance the short selling system and create a "level playing field" for retail investors, with institutional investors dominating 92 percent of the country's stock short sales.

On Thursday, the ruling party and government officials also decided to limit institutional investors' loan repayment period for borrowed shares to 90 days -- aligning with regulations for individuals -- and allow up to four extensions to ensure repayment within 12 months.

Penalties will also be substantially enhanced, increasing fines for short selling violations from three to five times the unjust gains to four to six times, with heavier prison sentences imposed based on the scale of illegal profits.

In addition, institutional investors will be mandated to implement the government's forthcoming centralized monitoring system, the Naked Short Selling Detection System, which will allow the Korea Exchange to monitor and regulate short selling stocks and transactions almost in real time.

To ensure the institutions' compliance with this system, amendments to the Capital Markets Act are crucial. During Thursday's session, policymakers called for legislative support to facilitate the system's implementation.

Authorities anticipate the amendments to be enacted within this year, aiming to complete the establishment of the detection system by the first quarter of next year.

Following Thursday's meeting, the FSC announced it would review the discussed matters regarding short selling regulations and promptly announce finalized measures.

Meanwhile, since November the FSS has found that nine firms engaged in illegal naked short selling totaling 211.2 billion won ($153.7 million) in the local market. Charges have been filed and fines totaling 25.6 billion won imposed on two firms, while sanction procedures are underway for the remaining seven firms.

By Choi Ji-won(jwc@heraldcorp.com)