Korea to crack down on illegal short-selling practices

President Yoon Suk-yeol speaks during a ministerial meeting on economy held at the Healthcare Innovation Park at Seoul National University Bundang Hospital in Seongnam, Gyeonggi Province, Wednesday. Yonhap

Supervision and investigation of suspicious short-selling practices to be strengthened

By Anna J. Park

The government will strengthen supervision over short-selling trades that breach the law as well as unfair trade practices related to the practice. There have been growing calls from retail investors to ban short-selling, while several securities firms were found to have violated related rules.

President Yoon Suk-yeol strongly urged financial authorities and prosecutors to draw up measures in order to eradicate wrongful acts surrounding short-selling and stock market manipulation. According to the presidential office on Thursday, Yoon delivered those instructions on Wednesday afternoon.

“With a determination to stamp out illegal practices of short-selling without fail, related ministries, including financial authorities and the prosecution, need to come up with measures on the matter,” Yoon said. “Investors' concerns are rising over stock market manipulation using illegal short-selling practices. Under such circumstances, local stock markets cannot earn investors' trust.”

Following the president's order, the regulatory Financial Services Commission (FSC), the Financial Supervisory Service (FSS), the Korea Exchange (KRX) as well as the Supreme Prosecutors' Office (SPO) gathered on Thursday morning to hold a joint meeting to discuss effective measures to curb illegal short-selling practices. They jointly released strengthened punitive measures on short-selling, after the meeting.

First of all, the government will strengthen investigations into allegations of wrongful short-selling practices as well as short-selling related unfair trade practices. Investigations on naked shorting ― the illegal practice of short-selling without borrowing shares ― will also be reinforced, as supervisions on them will be conducted on a regular basis by the ministries. Naked short-selling is already illegal in Korea and offenders could face prison terms.

Financial Services Commission (FSC) Chairman Kim Joo-hyun, second from right, speaks at a joint meeting attended by key officials from the Financial Supervisory Service (FSS), the Korea Exchange (KRX) and the Supreme Prosecutors' Office (SPO) held at the Korea Development Bank on Yeouido in Seoul, Thursday. Courtesy of FSC

The four related organizations will cooperate closely to share information about ongoing investigations. Centering on the Joint Investigative Team on Stock Crimes installed at the Seoul Southern District Prosecutors' Office (DPO), the related financial authorities could accelerate the speed of investigations, while taking a stricter stance on such crimes. The supervisory investigation department at the KRX and the FSS will be expanded as well.

The country's short-selling system will also be changed to create a fairer playing field for retail investors. The government's monitoring of long-term short-selling transactions will be strengthened. For those who maintain short-selling positions on a large number of shares that continue for more than 90 days will be required to report detailed information of their borrowing status.

“On average, institutional investors borrow shares for about 70 days. The government plans to create a new regulation under which investors will be obligated to make reports to financial authorities, when they borrow shares for more than 90 days,” an FSC official said during a press briefing on Thursday.

The government also plans to beef up current protective measures against short-selling, by modifying rules regarding designations of overheated short-selling stocks. If the weight of short-selling exceeds 30 percent of a stock's trading volume in a single trading session, that condition alone will make the stock be designated as an overheated short-selling stock, and shorting of the stock will be prohibited in the next trading session.

“Without eradicating illegal short-selling practices, it would be very hard to gain the trust of the capital market,” FSC Chairman Kim Joo-hyun said.

FSS Governor Lee Bok-hyun also vowed to proactively respond to wrongful acts surrounding short-selling, by invoking the joint prosecution team's fast-track procedures that could accelerate the speed of investigations

While strengthened supervisory efforts and investigations will be put into effect immediately, the government aims to complete by the end of the year revisions of related laws or regulations necessary for implementing the measures announced on Thursday.