Korea likely to lift short-selling ban in April after leveling playing field

South Korea’s financial regulator, the Financial Services Commission (FSC), said on Thursday it will extend its blanket stock short-selling ban by 10 months to the end of March 2025.

“If short sales resume now without a comprehensive monitoring system in place, there is a risk that large-scale illegal short selling will occur again,” said FSC Vice Chairman Kim So-young at a media briefing.

Analysts said Korea, Asia’s fourth-largest economy, will likely resume stock short-selling practice as early as April after revising relevant rules to level the playing field between retail and institutional investors and strengthening fines and punishments for illicit trading practices.

The government prohibited short selling of domestic stocks from Nov. 6 of last year through the first half of this year after some foreign banks were found to have executed a substantial amount of naked short sales, which is illegal in the country.

Last month, the Financial Supervisory Service said it fined Credit Suisse and Nomura Securities a combined 54 billion won ($40 million) in penalties over their short-selling practices.

HARSHER PUNISHMENT IN THE WORKS

Short-selling, a legitimate stock trading practice involving borrowing shares and then selling them in the market, has been an unpopular trading strategy among Korean retail investors, who often blame such a practice for sinking share prices.

Naked short selling, a practice that shorts stocks without making borrowing arrangements first, is not allowed in Korea.

Earlier on Thursday, the government held a meeting with the ruling People Power Party to finalize ways to revise short-selling rules before resuming the trading strategy.

After the meeting, the FSC said it would set up by March next year a centralized electronic monitoring platform to better detect naked short sales.

Government officials and the ruling party said they will consider mandating institutional investors, who account for more than 90% of short selling in Korea, to establish procedures to control illicit trade.

The authorities said they will also revise laws to introduce harsher punishment for illegal short sellers and adopt a mandatory repayment period of up to 12 months for both retail investors and institutional investors after short sales.

Currently, there’s no mandatory repayment period for institutional investors.

The FSC said it will hike the fines imposed on illegal short sellers.

Currently, those found guilty of naked short selling could be fined up to five times their gains from illegal trade.

The FSC said the maximum fine will be raised to as much as six times their profit.

BAN IMPEDES MSCI UPGRADE

Critics blame the inability to place bearish bets as a hedging strategy in Korea for reduced transparency in the domestic market.

Last week, global index provider MSCI, which categorizes Korea as an emerging market, downgraded the country's short-selling accessibility in its annual review – a move widely seen as a hurdle for Korea’s inclusion in MSCI’s developed-markets index.

Write to Han-Gyeol Seon at always@hankyung.com


In-Soo Nam edited this article.