In an assertive move to stabilize the financial market and foster fair trading conditions, South Korea has decided to suspend short-selling of stocks for a substantial period, the Financial Services Commission (FSC) has confirmed. The temporary ban, effective immediately, will span until the end of June 2024 and will apply to stocks within the Kospi 200 and Kosdaq 150 indices. This initiative gives regulators an opportunity to “actively” refine rules and systems governing market practices.
The announcement on Sunday indicated that the trading of borrowed shares, a key mechanism in short-selling strategies, will be halted starting from Monday. This development follows revelations of significant irregularities in the market.
Financial Services Commission Chairman Kim Joo-hyun addressed these concerns during a briefing, stating, “Amidst market turmoil, we’ve discovered massive illegal naked short-selling by global investment banks and circumstances of additional illegal activities.” Kim emphasized the detrimental impact of such activities on fair price formation and overall market confidence.
To combat the imbalance and illegitimate practices, South Korea is embarking on a quest for a “fundamental improvement” that seeks to level the playing field, particularly for retail investors. According to Chairman Kim, measures will be considered to align the short-selling requirements and conditions for both institutional and individual investors more closely.
Moreover, the nation is poised to introduce stringent penalties for those engaging in illegal short-selling activities, with a special investigation team set to delve into transactions conducted by global banks starting Monday.
Lee Bokhyun, the governor of the Financial Supervisory Service (FSS) watchdog, has informed reporters that approximately ten global banks, which dominate the short-selling transactions in the country, will be subject to investigations.
Despite ongoing efforts to rectify the system, there appears to be a consensus on the need for more stringent measures. The Financial Supervisory Service highlighted this need last week, announcing the formation of a special task force mandated to inspect global investment banks (IBs) for any illegal short selling practices. This move comes in the wake of a recent incident where two Hong Kong-based IBs were implicated in the illegal short selling of 56 billion won (approximately US$42.7 million) worth of stocks, fully aware of their inability to secure the necessary shares.
In pursuit of a resilient financial system, the FSC is committed to implementing comprehensive reforms by June 2024. These reforms aim to eliminate the perceived “unlevel playing field” that has been a point of contention among market participants, including ruling party lawmakers. The FSC plans to review and establish a robust system that will thwart the occurrence of illegal naked short selling in real-time, ensuring transparency and integrity in the South Korean financial markets.