[Financial Services Commission Report] "Enhancing Accessibility for Individual Investors in Short Selling and Strengthening Penalties" (Comprehensive)

[Asia Economy Reporter Park Jihwan] Financial authorities are focusing on lowering the threshold for short selling by individual investors this year. Alongside this, they will strengthen investigations into unfair trading related to illegal short selling and significantly enhance sanctions, including criminal penalties for regulatory violations. Regarding the politically charged issue of whether to resume short selling, a decision is expected to be made by February.

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

Currently, the FSC has formalized the lifting of the temporary ban on short selling, which was 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 drop, then repurchased at a lower price to return the borrowed shares. Its positive function is mainly to adjust overheated stock prices. However, a downside is that it increases downward pressure on stock prices.

First, the focus will be on increasing individual investors' access to short selling by securing stock lending volumes for individual investors and providing borrowing channels. The plan includes reducing market makers' short selling to about half 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 activity. This increases trading volume and prevents sudden price fluctuations. Short selling is allowed to hedge losses that market makers may incur in this process.

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 on selected targets notified by securities firms; this period will be shortened to tighten surveillance. Chairman Eun Sung-soo stated, "Due to recent legal amendments, penalties including fines up to the order amount and criminal punishments such as imprisonment for over one year can be imposed for illegal short selling," and emphasized, "To detect illegal short selling, dual computer systems are being established at both the exchange and securities firms." Additionally, the FSC is mandating the retention of short selling loan transaction information for five years and is working on methods to verify this data electronically rather than relying on handwritten records, which have been criticized as susceptible to manipulation.

On the same day, Chairman Eun avoided giving a direct answer regarding the controversial resumption of short selling scheduled for March 16, saying, "Please understand that I cannot speak clearly on this. I think a decision will be made in February." He added, "Short selling decisions have been made by the nine-member Financial Services Commission meetings and will continue to be so. I hope you understand that I cannot make definitive statements." He further noted, "There are no ongoing discussions with the ruling party or political circles, and when the regular National Assembly session opens in February, it will mainly be a process of listening rather than negotiating or expressing opinions."

This content was produced with the assistance of AI translation services.