Full Ban on Short Selling Until First Half of Next Year: "Correcting the Tilted Playing Field"

Measures to Resolve Short Selling Trading Conditions During Ban Period
Establishment and Promotion of Institutional Improvements to Prevent Naked Short Selling
Detection and Punishment of Illegal Short Selling by Foreigners and Institutions through Global IB Full-Scale Investigation

From the 6th until the first half of 2024 (end of June 2024), short selling will be completely banned on all domestic stock market listings. Currently, short selling is prohibited except for stocks included in the KOSPI 200 and KOSDAQ 150 indices. However, now short selling will be banned across all KOSPI, KOSDAQ, and KONEX stocks.

The Financial Services Commission (FSC) announced on the 5th that it has decided to impose a full ban on short selling until the first half of next year, citing the need for proactive measures against the rapidly increasing market uncertainty and concerns that habitual illegal naked short selling could undermine fair price formation in the market.

Previously, the FSC had imposed a full ban on short selling in March 2020 considering market volatility during the COVID-19 pandemic. Since May 2021, short selling was resumed only for stocks in the KOSPI 200 and KOSDAQ 150 indices. Historically, full bans on short selling have been implemented during economic crises such as the 2008 global financial crisis, the 2011 European debt crisis, and the 2020 COVID-19 pandemic to stabilize the market. The FSC explained, "Article 180, Paragraph 3 of the Capital Markets Act requires consideration of whether a short selling ban would hinder market stability and fair price formation," and that the recent market instability has led to this extraordinary full ban on short selling.

According to financial authorities, amid a sustained high-interest-rate environment and slowing global economic growth, geopolitical risks such as the Israel-Hamas conflict have increased, heightening uncertainty for South Korea’s economy, which is highly dependent on external factors. Particularly in the second half of the year, volatility in the domestic stock market has expanded to levels higher than major overseas markets, exacerbating market instability. Despite previous institutional improvements, repeated detection of illegal naked short selling by foreign and institutional investors has raised serious concerns about fair price formation in the domestic stock market. Recently, large-scale illegal naked short selling cases involving global investment banks (IBs) have been uncovered, with additional illegal activities under investigation.

The FSC stated, "Illegal short selling severely undermines fair price formation and market trust," and added, "We will treat this short selling ban period as a starting point for eradicating illegal short selling, and together with related organizations, we will pursue proactive institutional reforms beyond existing frameworks to ensure that unfair issues caused by short selling do not recur after resumption."

Promotion of Short Selling System Improvements

First, the FSC plans to fundamentally resolve the "tilted playing field" between institutions and individuals. Efforts such as extending the loan repayment period and lowering collateral ratios have significantly reduced the differences in borrowing conditions between securities lending and borrowing services. However, since these conditions are still not identical, criticism of a "tilted playing field" between individuals and institutions persists, and the FSC intends to actively explore fundamental solutions to this issue.

Additionally, alternatives to prevent naked short selling in advance will be sought. The FSC announced that it will review options for establishing a real-time blocking system for illegal naked short selling. It plans to thoroughly analyze the illegal short selling practices of foreign and institutional investors revealed in recent cases and gather broad opinions and public discussions from market experts and stakeholders. Based on this, the FSC will actively consider multifaceted measures to prevent naked short selling and, if necessary, work closely with the National Assembly to pursue legislation.

The FSC will also conduct a full investigation of global IBs to strongly detect and punish naked short selling. Given the confirmed habitual large-scale naked short selling by global IBs, a special short selling investigation team launching on the 6th will conduct a comprehensive investigation of global IBs. If additional illegal naked short selling is detected, strict sanctions and active criminal prosecutions will be applied under a zero-tolerance policy to eliminate the practice in the market. Furthermore, the FSC will actively discuss with the National Assembly ways to strengthen penalties and diversify sanction measures.

The FSC stated, "During the short selling ban period, we will promptly prepare improvement plans for the short selling system through close consultations with market experts and related organizations to ensure that the above institutional improvement tasks are swiftly implemented," and added, "We will also conduct public discussions on detailed measures and actively participate in the legislative process in the National Assembly."

Kim Ju-hyun, Chairman of the Financial Services Commission, emphasized, "The top priority of capital market policy is to create a fair and efficient market to protect investors and gain market trust," and said, "The government will take all possible measures to ensure that the short selling system becomes a system that all investors can trust."

Meanwhile, the short selling ban period decided at the temporary Financial Services Commission meeting is until the end of June next year. Whether to resume short selling will be determined by considering overall conditions at that time, including market trends and the implementation status of short selling system improvements.