South Korea tightens oversight of short selling
29 July 2022 S Korea
Image: AdobeStock/AddMeshCube
South Korea鈥檚 Financial Services Commission (FSC) has announced a package of measures designed to tighten oversight of illegal short selling and to improve the operation of the short-selling system.
In a meeting held between FSC representatives and market participants on 28 July, attendees raised concerns that investor mistrust in the short selling system has continued to build in the face of recent declines in global stock markets, according to a statement from the financial regulator.
The FSC has responded by stating that prompt measures are required to 鈥渂olster oversight and punishment over market-disturbing activities in capital markets linked to illegal short selling and short selling-based price rigging鈥�. This must be accompanied by 鈥減rompt improvements鈥� to the short-selling system to address the issues raised by investors.
These will focus on measures to strengthen oversight and punishment of illegal short selling activities. This will include wider powers to investigate 鈥渦nfair transactions linked to short selling鈥�, to monitor naked short selling activities and steps to expand investigation teams at the Korea Exchange and FSC charged with these responsibilities.
As part of this package, the financial authorities will reinforce procedures for identifying 鈥渙verheated short selling items鈥�. A stock will be classed as 鈥渙verheated鈥� when the proportion of short orders is 30 per cent of issued share capital 鈥� even without a major decline in the share price or a significant increase in short sale transaction volume.
Through fast-track investigation procedures established through a joint investigation unit at the Seoul Southern District Prosecutors Office, the financial authorities will have power to impose stronger penalties, including larger fines, when the level of damage caused by malpractice in this area is found to be particularly severe. This will include a requirement for perpetrators to forfeit illegal profits and 鈥渃oncealed properties鈥� secured through illegal short selling.
Significantly, the financial authorities also propose measures to improve short selling opportunities for retail investors. This will include a 20 per cent reduction in the margin requirement applied to individual investors from 140 per cent to 120 per cent.
The FSC will require steps to tighten oversight and to strengthen financial penalties to begin 鈥渁s soon as possible鈥� in a bid to improve public trust in the short selling system. Enactment of measures that require amendments to existing regulations should commence by the end of 2022.
This reform programme follows a temporary ban on short selling activities imposed by the market authorities in South Korea in March 2020 designed to 鈥渉elp ease market anxieties鈥� with the onset of the COVID-19 pandemic.
The FSC authorised a partial resumption of short sales in stocks falling within the KOSPI 200 and KOSDAQ 150 indices in May 2021.
In a meeting held between FSC representatives and market participants on 28 July, attendees raised concerns that investor mistrust in the short selling system has continued to build in the face of recent declines in global stock markets, according to a statement from the financial regulator.
The FSC has responded by stating that prompt measures are required to 鈥渂olster oversight and punishment over market-disturbing activities in capital markets linked to illegal short selling and short selling-based price rigging鈥�. This must be accompanied by 鈥減rompt improvements鈥� to the short-selling system to address the issues raised by investors.
These will focus on measures to strengthen oversight and punishment of illegal short selling activities. This will include wider powers to investigate 鈥渦nfair transactions linked to short selling鈥�, to monitor naked short selling activities and steps to expand investigation teams at the Korea Exchange and FSC charged with these responsibilities.
As part of this package, the financial authorities will reinforce procedures for identifying 鈥渙verheated short selling items鈥�. A stock will be classed as 鈥渙verheated鈥� when the proportion of short orders is 30 per cent of issued share capital 鈥� even without a major decline in the share price or a significant increase in short sale transaction volume.
Through fast-track investigation procedures established through a joint investigation unit at the Seoul Southern District Prosecutors Office, the financial authorities will have power to impose stronger penalties, including larger fines, when the level of damage caused by malpractice in this area is found to be particularly severe. This will include a requirement for perpetrators to forfeit illegal profits and 鈥渃oncealed properties鈥� secured through illegal short selling.
Significantly, the financial authorities also propose measures to improve short selling opportunities for retail investors. This will include a 20 per cent reduction in the margin requirement applied to individual investors from 140 per cent to 120 per cent.
The FSC will require steps to tighten oversight and to strengthen financial penalties to begin 鈥渁s soon as possible鈥� in a bid to improve public trust in the short selling system. Enactment of measures that require amendments to existing regulations should commence by the end of 2022.
This reform programme follows a temporary ban on short selling activities imposed by the market authorities in South Korea in March 2020 designed to 鈥渉elp ease market anxieties鈥� with the onset of the COVID-19 pandemic.
The FSC authorised a partial resumption of short sales in stocks falling within the KOSPI 200 and KOSDAQ 150 indices in May 2021.
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