Ruling and Opposition Parties Unite in Voice to Improve the 'Gongmaedo System'

Ruling and Opposition Parties Call for Full Ban on Short Selling... "System Improvement"
Hong Ik-pyo: "In-depth Discussion on Capital Market Act Amendments"
Lee Man-hee: "Strengthening Investor Rights... Full Effort on Practical Measures"

As the ruling and opposition parties unite in their call for institutional reforms to eradicate illegal short selling, attention is focused on whether the short selling system, which individual investors regard as a 'tilted playing field,' will undergo a complete overhaul. With the government and ruling party planning to impose a total ban on short selling until the first half of next year to investigate illegal short selling activities by global investment banks (IBs), thereby appealing to the votes of 14 million investors, the Democratic Party of Korea is also accelerating efforts to improve the system belatedly.

Hong Ik-pyo, the floor leader of the Democratic Party, said at a floor strategy meeting held at the National Assembly on the 7th, "The Democratic Party pledged during the last presidential election to resolve imbalances in the stock market, such as discrimination between individuals and institutions," adding, "We will thoroughly discuss the already submitted 'Capital Market Act amendment bills' and do our best to ensure that institutional improvements meet the public’s expectations."

Hong Ik-pyo, floor leader of the Democratic Party of Korea, is speaking at the floor strategy meeting held at the National Assembly on the 7th. On the right is Lee Gae-ho, chairman of the Policy Committee.
[Photo by Yonhap News]

Currently, six amendment bills related to improving the short selling system are pending in the National Assembly, including the Capital Market Act amendment bill (sponsored by Democratic Party lawmaker Kang Hoon-sik) that introduces a computerized system for short selling transactions to prevent naked short selling through this system. The Democratic Party plans to submit these bills to the National Assembly’s Committee on Economy and Finance on the 15th and hold substantive discussions at the bill subcommittee on the 21st of the same month. Floor leader Hong said, "Several lawmakers are preparing additional proposals." Earlier, he stated on a broadcast the previous day, "To fundamentally improve the short selling system, we must first correct the tilted playing field between individuals and institutional foreign investors," and added, "If institutions commit illegal acts through naked short selling, punitive damages exceeding ten times the profits earned should be imposed to prevent reckless behavior."

The ruling party also promised institutional improvements. On the same day, Lee Man-hee, Secretary-General of the People Power Party, said at the National Assembly floor strategy meeting, "The short selling policy promoted by the People Power Party is not a ban on short selling without institutional improvements but is premised on fundamental system reforms," adding, "The People Power Party will focus all its efforts on improving unreasonable discrimination, strengthening investor rights, and presenting practical measures."

People Power Party Floor Leader Yoon Jae-ok is holding a National Assembly inspection countermeasure meeting on the 20th at the National Assembly. From the left, Lee Yang-su, Senior Deputy Floor Leader; Yoo Ui-dong, Chairman of the Policy Committee; Floor Leader Yoon; and Lee Man-hee, Secretary-General.
[Photo by Yonhap News]

The reason why the ruling and opposition parties are actively pursuing improvements to the short selling system is that the government’s announcement of a short selling ban ahead of next year’s general election has caused a megaton-level impact on the domestic stock market.

Immediately after the announcement of the temporary short selling ban, the KOSPI closed at 2,502.37, soaring 5.66% (134.03 points) from the previous session, marking the largest increase in history. In the Seoul foreign exchange market, the won-dollar exchange rate also dropped sharply by 25.1 won to close at 1,297.3 won compared to the previous trading day. This was due to foreign investors who had engaged in short selling conducting 'short covering' (buying back stocks in anticipation of a price rise) in response to the government’s short selling ban.

In response, Floor Leader Hong criticized, "With less than five months left until the general election, the government and ruling party have been consistent in 'testing the waters' without clear goals such as institutional reform or protection of individual investors, leading to dominant media evaluations labeling it as 'populism for the election,'" adding, "Above all, the financial authorities’ policy objectives and process management are not sophisticated, which seems to have exacerbated market side effects." On the other hand, Ryu Sung-gul, a ruling party member and ranking member of the National Assembly’s Planning and Finance Committee, emphasized, "There have been ongoing criticisms that illegal short sellers who disrupt the market and harm honest investors have been left unchecked," and said, "In such circumstances, a total ban on short selling to improve the system is a necessary measure."