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By Jun Ji-hye
Financial authorities in Korea have established final guidelines to prevent illegal naked short selling. Under these regulations, the authorities plan to complete the computerization of short selling transactions by the end of March, after which such activities will be fully permitted again.
The country’s ban on short selling was put in place in November 2023 and was originally set to expire at the end of June 2024. But it was pushed back to March 31 this year.
On Sunday, the Financial Supervisory Service (FSS), together with the Korea Exchange, announced that the integrated short selling guidelines have been finalized.
The core of the guidelines focuses on strengthening management responsibilities for global investment banks (IBs), institutional investors and financial investment firms to prevent illegal naked short selling, which is prohibited in the domestic market.
The financial watchdog decided to differentiate the level of internal control standards for each corporation based on the potential for naked short selling.
Institutions that engage in large-scale short selling transactions — such as those with short selling balances of 0.01 percent of the issued shares or 1 billion won ($685,000) or more — along with financial investment firms playing roles of market makers or liquidity providers will be required to establish their own short selling balance management systems.
Institutional investors will be required to disclose the purpose of borrowing stocks, specifically for short selling, starting from the borrowing stage, and to manage borrowed stocks separately for this purpose.
Previously, institutions had managed borrowed stocks for various purposes, such as short selling, cash collateralized transactions and securities lending, under a unified system.
The responsibility of securities firms receiving short selling orders has also been strengthened. These companies will be required to verify annually whether institutions, such as IBs, have established internal control standards and computerized systems. The results of this verification must be reported to the FSS within one month.
To enable the information linkage between large-scale short selling firms and the Korea Exchange’s central short selling monitoring system (NSDS), the new regulations require each firm to submit their daily balances and transaction details for all stocks they hold to the exchange within two business days.
The exchange’s market surveillance committee has been granted the authority to request these submissions. This measure aims to establish a foundation for the exchange to verify the accuracy of the information entered into the NSDS.
The financial authorities plan to finalize the regulatory amendments by March after making a pre-announcement of the rules by Jan. 31 and completing the necessary administrative procedures.
The FSS will hold a briefing for securities firms receiving short selling orders later this month.
“Next month, an open discussion with investors will be held on topics such as the computerization of short selling and improvements to market infrastructure,” a FSS official said. “In March, we will hold a ceremony for the system linkage between the exchange and firms, as well as a demonstration of the NSDS.”
English (United States) ·