Lee Yeon-woo is a financial journalist at The Korea Times. Her wide range of reporting includes policies, macroeconomics, stock market, companies and even crypto. She is passionate about connecting the dots in Korean finance and making it easier for foreign nationals to understand. Based on her previous experience as a national reporter, she also has a keen interest in social issues within the sector, including gender equality and ESG. Your tips and insights are always appreciated. You can send them to yanu@koreatimes.co.kr.
Debate on total short selling prohibition intensifies in Korean market
An individual investor protests in front of the Financial Services Commission (FSC) headquarters in Seoul, seeking thorough investigations into illegal short selling activities in this April 2019 photo. He holds a picket saying "SHORT SELLING OUT" and "CHOI JONG-KU (then chairman of the FSC) OUT." Newsis
By Lee Yeon-woo
Financial regulator to inspect all global IBs for illegal short selling
Debates about the complete prohibition of short selling are intensifying in Korea, especially in light of recent illicit short-selling activities by global investment banks (IB), which have angered individual investors. Even the financial authorities, which continuously supported the full resumption of short selling, have now shifted their stance to reviewing the regulation from the ground up.
The Financial Supervisory Service (FSS) announced Tuesday the establishment of a special investigative team focused on short selling, as well as a comprehensive audit of global IBs.
"The allegations of illegal short selling in the market have been verified this time, confirming that prominent financial institutions have systemically violated domestic regulations," the FSS stated. "Given this revelation, there's a rising mistrust towards short selling in the market, leading to calls for thorough investigations into other global investment banks."
The announcement came after Financial Services Commission (FSC) Chairman Kim Joo-hyun said that he would "improve all systems through transparent and reasonable procedures from the outset."
"I've observed global IBs causing issues, consistent with the recent FSS announcement. It has become clear to me that individual investors have ample reason to distrust the stock market," Kim said during a parliamentary audit, Friday. This marks a significant departure from his earlier position, which advocated for a "full resumption of short selling in the mid to long term."
Financial Supervisory Service Governor Lee Bok-hyun, center, speaks during a parliamentary audit held in Seoul, Friday as Financial Services Commission Chairman Kim Joo-hyun, right, listens. Yonhap
Previously, Korea had banned short selling in its market in March 2020 for six months, in response to COVID-19. It then extended the period twice. Although the practice has partly resumed for large corporation stocks, it remains in effect across most of the market.
Individual investors have been advocating for a complete prohibition of short selling, arguing that it's driving down stock prices in the country. In contrast, financial authorities have emphasized that short selling is a global standard. They have considered the timing of its full resumption, aiming to achieve Morgan Stanley Capital International's (MSCI) developed market status.
However, the sentiment shifted significantly when the FSS identified two Hong Kong-based investment banks, BNP Paribas and HSBC, for their deliberate and habitual engagement in illegal short-selling activities. In response, over 50,000 individual investors submitted a petition to the National Assembly calling for changes in regulations.
The fact that the benchmark KOSPI has recently fallen below the 2,300 mark further fuels the debate on a complete ban on short selling.
With the FSC's announcement, it is expected that issues such as the introduction of an electronic short-selling system and the cessation of discriminatory practices against individual investors will be on the table, given that these have been persistent demands from small investors.
However, such a move could potentially face opposition from international organizations and might draw negative evaluations from global index providers, thereby increasing the pressure on financial regulators.