By Kim Tae-gyu
Staff Reporter
Beginning June 1, the government will again allow short selling for non-financial stocks as the Seoul bourse shows a clear sign of stabilizing.
The Financial Services Commission (FSC) banned the practice last October when the global stock market suffered crashes in the aftermath of the collapse of Lehman Brothers.
``We decided to drop the rules that restrict the short selling of non-financial securities since stock prices and foreign exchange rates recovered the levels of last October,'' FSC Director General Hong Young-man said.
``However, we opted to exclude financial securities because we do not think the global financial crisis is over. We plan to keep the regulation alive for the time being,'' he said.
When the FSC put restrictions on short selling on Oct. 1 last year, the benchmark KOSPI was 1,439.67 points. Thereafter, the index plunged but resumed of late to close at 1,435.7 Wednesday.
In addition, the Korean won substantially appreciated against the greenback over the past three months to end at 1,251 won per dollar Wednesday, similar to 1,187 won on Oct. 1.
``Many other countries such as the United States, Canada and the United Kingdom also lifted restrictions on short selling. Hence, we followed suit,'' Hong said.
``Plus, short selling has its own positive function of helping market participants find out the best price. We expect that the functionality will be revived,'' he said.
Starting next month, those who want to short-sell stocks can borrow ones from the Korea Securities Depository before disposing of them in the market.
They are eventually required to buy the shares and return them to the Korea Securities Depository. Subsequently, the strategy is usually employed when a bearish market is expected.
However, naked short selling will not be allowed as usual.
According to Wikipedia, naked shorting is the practice of selling a financial instrument short without first borrowing the shares or ensuring that the shares can be borrowed as is done in the covered short sale.
It has been prohibited in Korea, as the country worried such selling might generate too big a volatility.