The Era of Short Selling for Individual Investors... Securities Firms to Lend Stocks Worth 2.4 Trillion Won Starting from the 3rd of Next Month

New Short Selling Investors Must Complete Pre-Education Starting Tomorrow
Must Sign Credit Loan Agreement with Securities Firm and Open New Account
Investment Limit 30 Million KRW... Limit Increases with More Short Selling Transactions

[Asia Economy Reporter Ji Yeon-jin] The Financial Services Commission announced on the 19th that a new individual stock lending system will be implemented starting from the 3rd of next month, when short selling resumes.

Until now, individual investors conducted short selling transactions through the 'stock lending (Daeshu) system' provided by Korea Securities Finance Corporation and individual securities firms. As of the end of February last year, just before short selling was banned due to COVID-19, there were six securities firms providing stock lending services, with a lending scale of only 20.5 billion KRW (393 stocks).

In response to criticisms that the shortage of lending volume lowered individual investors' access to short selling, the new individual stock lending system will be expanded to 28 securities firms that handle margin loans. However, on the 3rd of next month when short selling resumes, 17 securities firms (NH Investment & Securities, Kiwoom, Shinhan Financial, Daishin, SK, Yuanta, Korea Investment, Hana, KB, Samsung, Kyobo, Mirae Asset, Cape, BNK, Sangsangin, Hanyang, Buguk) will start first, and 11 securities firms including Ebest, Eugene, Hi, Meritz, KTB, IBK, DB, Hanwha, Hyundai Motor, Shin Young, and Yuhwa will implement the system within the year.

The Financial Services Commission expects that stock lending worth a total of 2.4 trillion KRW will be possible for all stocks in the KOSPI 200 and KOSDAQ 150 where short selling is permitted.

The available lending stocks and quantities will fluctuate daily depending on the securities firms' stock lending pool composition, and individual investors using the stock lending system can borrow stocks for up to 60 days, unlike institutions and foreigners. A Financial Services Commission official explained, "In case the lender demands the return of stocks within the borrowing period, the return is guaranteed by using stocks within the pool held by Korea Securities Finance Corporation," adding, "In the case of inter-institution lending, stocks must be returned immediately upon demand." Similar to margin loans, borrowers must pay fees set independently by each securities firm for stock borrowing.

Short selling carries the risk of losses exceeding the principal (sale amount) if stock prices rise. Investors must enter into a stock lending agreement with the securities firm handling individual stock lending, and if they do not have an existing account, they must open a new one. Since failure to comply with the collateral ratio specified in the agreement may result in forced liquidation through a margin call, caution is required.

Investors without prior short selling experience must complete pre-education provided by the Korea Financial Investment Association and simulated trading on the Korea Exchange before engaging in short selling transactions. Pre-education and simulated trading will be available starting from the 20th.

New investors can short sell up to 30 million KRW, and if they have traded five or more times and have a cumulative borrowing scale of 50 million KRW or more, the investment limit increases to 70 million KRW. For second-stage investors who have traded for more than two years or professional investors, there is no limit on short selling transaction amounts.

Also, individual investors, like institutions, will be restricted from participating in rights offerings if they short sell the relevant stocks from the day after the rights offering plan is disclosed until the day the issue price is determined. Violations will result in fines of up to 1.5 times the amount of unfair gains.

Investors whose net short positions from short selling transactions exceed 0.01% of the listed shares and whose valuation is 100 million KRW or more, or whose valuation exceeds 1 billion KRW, must report the details to the Financial Services Commission and the Korea Exchange.