[Financial Services Commission Report] "Enhance Accessibility of Short Selling for Individual Investors and Strengthen Penalties"

[Asia Economy Reporter Park Jihwan] Financial authorities are focusing on lowering the threshold for short selling by individual investors this year. Along with this, they will strengthen investigations into unfair trading related to illegal short selling and significantly enhance sanctions such as criminal penalties for regulatory violations.

The Financial Services Commission (FSC) announced its 2021 work plan containing these details on the 19th. The FSC plans to improve the system to enhance fairness in the stock market through improvements to the short selling system.

Currently, the FSC has formalized the lifting of the short selling ban, which was temporarily introduced for one year starting March last year. Aiming for resumption, it plans to complete system improvements such as strengthening penalties for illegal short selling, improving the market maker system, and increasing individual investors' access to short selling. Short selling is an investment technique where stocks are borrowed and sold in anticipation of a price decline, and then repurchased at a lower price to return the borrowed shares. Its positive function is mainly to adjust the prices of overheated stocks. However, its downside is that it increases downward pressure on stock prices.

The FSC will first focus on increasing individual investors' access to short selling by securing stock lending volumes for individual investors and providing borrowing channels. It plans to reduce market makers' short selling to about half of the current level by excluding highly liquid stocks from market making and banning short selling on Mini KOSPI 200 futures. The market maker system helps investors trade smoothly by quoting both buy and sell prices for stocks with low trading volume. This increases trading activity and prevents rapid price fluctuations. In this process, short selling is allowed to hedge losses that market makers may incur.

The inspection cycle for detecting illegal naked short selling will be shortened from six months to one month. Currently, inspections are conducted every six months by selecting some targets notified by securities firms, but this period will be shortened to tighten the surveillance network.

Amendments to subordinate regulations following revisions to the Capital Markets Act will also be pursued, including strengthening penalties for illegal short selling and introducing an obligation to retain lending transaction information for short selling purposes. For illegal short selling, fines of up to 500 million KRW or up to 1.5 times the unfair gains will be imposed within the order amount range (participation in paid-in capital increase after short selling). The fines for violations will be imposed comprehensively considering the short selling order amount and profits gained from the violation. Lending transaction information for short selling purposes must be retained for five years, and the financial authorities must be able to receive the information immediately upon request.