'Stock Brokerage Short Selling Monitoring Act' Promotion..."Targeting Parliamentary Approval in February"

[Image source=Yonhap News]

[Asia Economy Reporter Ji Yeon-jin] A bill mandating all domestic securities firms to establish a pre-monitoring system for short selling is being promoted. Amid intense controversy over the resumption of short selling scheduled for March, discussions on whether to further extend the ban on short selling are expected to take place after the Lunar New Year holidays next month during a government-party consultation.

Park Yong-jin, a member of the National Assembly's Political Affairs Committee from the Democratic Party of Korea, plans to propose an amendment to the Capital Markets Act that requires securities firms to build a ‘pre-monitoring system’ to block illegal short selling on their own. On the 25th, Park said, "I have proposed a system improvement plan to the party’s Policy Committee to equip securities firms with a preemptive no-borrow short selling blocking system," adding, "We are preparing the bill aiming for passage in the February extraordinary session."

Short selling is a transaction where stocks are borrowed and sold when a decline in stock prices is expected. It involves borrowing stocks of companies expected to fall in price, selling them in advance, and then repurchasing them at a lower price later to return the borrowed stocks, thereby making a profit. While it serves a positive function by preventing bubbles caused by stock prices being overvalued relative to their intrinsic value, it has been criticized for being exploited by institutions and foreigners as a means of market manipulation.

There have been multiple suspicions of illegal short selling because the system allows sell orders to be placed arbitrarily regardless of whether the borrowed stocks have actually been delivered. In 2018, Goldman Sachs, a foreign investor, was fined 7.548 billion KRW by financial authorities for engaging in ‘naked short selling’ by placing sell orders without borrowing stocks. Recently, ‘Donghak Ants’ (individual investors leading the stock market) have strongly opposed the resumption of short selling.

The amendment includes a mandatory provision requiring securities firms to have an electronic system that verifies the possession of borrowed stocks before placing sell orders, with financial authorities overseeing this system. It also contains clauses to prevent the falsification or alteration of evidence related to illegal short selling in advance and to punish brokers who violate these rules.

However, resistance is expected since securities firms will have to bear the costs of implementing such monitoring systems. An industry insider said, "If introducing a pre-monitoring system can restore market trust, it is a good system," but added, "It is an unreasonable demand to impose costs on market participants when the supervisory authorities responsible for monitoring short selling should be the ones to establish the system."

In March last year, the Financial Services Commission imposed a six-month ban on short selling as the stock market plummeted due to the impact of the novel coronavirus (COVID-19). The ban was extended for another six months and is scheduled to be lifted on March 16. However, given the strong demands for a ban on short selling from the political sphere ahead of the April by-elections, the possibility of an additional extension is considered high. Options being discussed include extending the ban for another 3 to 6 months and allowing short selling only on a limited number of top stocks based on market capitalization and trading volume.

The Democratic Party plans to discuss the possibility of further extending the short selling ban through consultations with the Financial Services Commission next month. Yoon Kwan-seok, the chairman of the National Assembly’s Political Affairs Committee from the Democratic Party, said, "If the Financial Services Commission prepares improvement measures, the decision on whether to resume short selling will be made," but added, "Discussions between the party and government are expected to take place only after the Lunar New Year holidays."