[Q&A] "ETF LP, No Illegal Short Selling... Exceptional Measures Continue"

Financial Supervisory Service to Hold Briefing Session on the 28th

On the 28th, the Financial Supervisory Service (FSS) announced that it conducted on-site inspections targeting six securities firms acting as liquidity providers (LPs) for exchange-traded funds (ETFs), and found no illegal short selling.

Hwang Seon-oh, Deputy Governor of the FSS, made this announcement at 10 a.m. during a press briefing held at the FSS office in Yeouido titled "ETF LP Short Selling Status and Market Rumor Inspection Results Related to Short Selling."

It was confirmed that the six LP securities firms only engaged in short selling transactions within the volume confirmed as borrowed through the Korea Securities Depository (KSD) and others. Since external lending balances are managed through the KSD, short selling without borrowing by LP securities firms is fundamentally blocked.

The FSS also investigated rumors related to short selling in the market using EcoPro BM as a sample and confirmed that the volume of short selling transactions had decreased. EcoPro BM is a stock that has attracted many investor suspicions and has a high volume of short selling transactions. The claim that overall short selling transactions increased after the ban on illegal short selling was also found to be untrue. Approximately 2.5 billion KRW worth of EcoPro BM shares flooded the stock market from October 16 to 19 were identified as shares held by the former chairman of EcoPro BM, whose personal information was stolen, rather than being due to short selling.

The following is a Q&A session with Deputy Governor Hwang Seon-oh and Kim Hyung-soon, Director of the Financial Investment Inspection Division 2.

- Which six LP securities firms were subject to the on-site inspection?

▲ They were five securities firms with the highest ETF short selling volumes between November 6 and 10, and one securities firm that was the subject of rumors. We cannot disclose the specific names.

- This inspection seems to have alleviated market suspicions about ETF LPs. Will the exceptions to the short selling ban continue?

▲ Regarding whether the short selling permission for ETF LPs will continue, the explanatory materials described the role of LPs supplying liquidity. Short selling by LPs is considered an essential function as long as ETFs are traded in the market.

- If all short selling transactions were for hedging purposes, do LPs earn any income from short selling?

▲ LPs sometimes make a small profit and sometimes incur losses, but their purpose is not to earn profits beyond hedging. From January to October this year, the average profit earned by the six firms performing LP functions was only about 0.01% of the total transaction amount. This indicates it is not profit-based. LPs receive fees from asset managers for their activities, which is their main source of income.

- There are many rumors related to LPs. Why was an on-site inspection conducted this time in particular?

▲ Market trust is important for the government to perform its roles and functions. If rumors spread that short selling is occurring despite the ban, it undermines the credibility of our work. These rumors are being spread mainly among individual investors as if they were facts. We believe this damages trust in the capital market. We will continue to strictly respond to any actions that harm the capital market in this way.

- Besides EcoPro BM, have you checked other stocks related to short selling suspicions?

▲ There are several stocks, but we selected EcoPro BM as a sample because it had many investor suspicions and the highest short selling volume to verify the facts. Other stocks are expected to be similar. The overall short selling trend is also similar. Although rumors exist, the FSS directly verified major stocks involved in ETF short selling, and smaller stocks were all checked through each company.

- Regarding the sale of shares owned by the former chairman of EcoPro BM, how is the sale by the unidentified party being handled?

▲ This is under police investigation, and the FSS believes there is nothing further it can do.

- I understand that this investigation into illegal short selling is larger than previous cases involving global investment banks (IBs).

▲ This falls under the disclosure investigation division, so it is difficult to respond.

- There are many rumors specifically targeting certain securities firms. Why do baseless rumors about particular firms arise?

▲ We do not know where or why these rumors originate. However, we are monitoring the channels through which they are mainly distributed.