South Korea to Re-Implement Short-Selling Ban to Promote Fairness in Market
SEOUL, Nov 5 (Reuters) – South Korea’s financial authorities announced on Sunday that they will once again impose a ban on short-selling shares starting from Monday until at least June 2022. The move aims to create a “level playing field” for both retail and institutional investors.
The ban on short-selling was lifted in May 2021 for trades involving shares of companies with large market capitalizations included in the KOSPI200 and KOSDAQ150 indices. However, it remained in place for most other stocks.
Short-selling involves selling borrowed shares with the intention to buy them back at a lower price, profiting from the difference. By reinstating the ban, South Korean authorities hope to address the perceived imbalances between institutional and retail investors.
“The measure is aimed at fundamentally easing ‘the tilted playing field’ between institutional and retail investors,” stated Financial Services Commission (FSC) Chairman Kim Joo-hyun during a news briefing.
Kim further explained that major foreign investment banks have been engaging in unfair trades, particularly amidst ongoing uncertainties in financial markets. The decision to re-implement the ban was made due to the impossibility of maintaining fair trading discipline.
The FSC plans to review market activity in June to assess if significant improvements have been made, which may lead to the lifting of the ban.
In addition to reinstating the ban, South Korean regulators announced last week that they would establish a team of investigators to probe short-selling by foreign investment banks. Their focus will be on identifying any illegal activities, including so-called naked short-selling. It is important to note that naked short-selling, which involves selling shares without having borrowed them or ensuring they can be borrowed, is already prohibited in South Korea.
The Financial Supervisory Service also announced in October that two Hong Kong-based investment banks would likely face fines for engaging in naked short-selling transactions worth 40 billion won ($29.58 million) and 16 billion won respectively. Earlier this year, the regulator fined five foreign firms, including Credit Suisse, for naked short-selling.
The uncertainty surrounding short-selling regulation has been cited as one of the factors that need to be resolved for influential index provider MSCI to upgrade South Korea to developed-market status.
Reporting by Jack Kim; Editing by Michael Perry and Christopher Cushing