[Q&A] Kim So-young "Expecting Prompt Passage of Short Selling Improvement Act"

Vice Chairman of FSC Remarks at Back Briefing on 13th
Q3 Subordinate Regulation Amendments... Legislative Process in Second Half
"Significant Resumption of Short Selling After March Next Year"

[Image source=Yonhap News]

Kim So-young, Vice Chairman of the Financial Services Commission, stated on the 13th, "There is a national consensus as the public discussion process regarding the short-selling system improvement plan has been extensive," expressing hope that the bill will be passed promptly.

Vice Chairman Kim explained at a back briefing on the short-selling system improvement plan held at the Government Complex Seoul in the afternoon, "We have informed the National Assembly about the development of the electronic system and institutional improvements, and these matters have been thoroughly and closely discussed with related agencies and domestic and foreign investors," adding, "There is a considerable consensus."

Earlier, the Financial Services Commission decided to extend the full ban period on short selling until March 30 next year after discussions with related organizations and the National Assembly. Last year, the Financial Services Commission announced a full ban on short selling until June 30 this year, but decided to extend the ban period until March 30 next year to complete the establishment of an electronic system to prevent illegal short selling. The government plans to first revise subordinate regulations that do not require legislative amendments in the third quarter and also promote legislation. It is expected to be expedited through lawmakers' bills in the second half of this year.

Below is a Q&A session with Kim So-young, Vice Chairman of the Financial Services Commission, and others.

- Is it correct that the resumption of short selling will be on March 30?

▲ The reason we banned short selling is that illegal short selling is quite widespread and adversely affecting the market, and we did not have a system to prevent it. Once the system to prevent illegal short selling is established next year, short selling will resume. I believe short selling will resume from March 31 next year, after the system is built.

- Will short selling be fully resumed without exceptions for all stocks on March 31 next year?

▲ We expect the short-selling electronic system to be established by the end of March next year, and once it is built, short selling will resume from March 31. However, since you asked for more detailed questions, it is difficult to state clearly, but please understand that a substantial level of short selling will resume.

- If the schedule for building the electronic system is accelerated, can the resumption date be moved forward?

▲ The current system schedule was created after very close negotiations with the Financial Supervisory Service, the Korea Exchange, related agencies, and domestic and foreign investors. It is expected to proceed as scheduled.

[Image source=Yonhap News]

- Please provide a specific schedule including the preparation of the bill.

▲ There are parts that can be amended through subordinate regulations without the need for legislation. Two parts, lowering the major shareholder collateral ratio and strengthening the disclosure standards for short-selling balances, can be done through subordinate regulation amendments. These are planned to be revised in the third quarter. Guidelines related to the internal balance management system and internal control standards within institutions are expected to be issued around the third quarter, and preparations will be encouraged within the year. The establishment of the central inspection system will take relatively longer, but it has already started and is scheduled to be completed by March 2025.

- Do you see little disagreement between the ruling and opposition parties regarding the need for legislative amendments?

▲ I mentioned the development of the electronic system and institutional improvements, which have already been extensively and closely discussed with related agencies and domestic and foreign investors. There is a considerable consensus.

- If the legislative amendments are not made as scheduled, is it uncertain whether the resumption can start in the second quarter?

▲ Since the public discussion process has been extensive, there is a considerable national consensus overall. We expect the bill to be discussed and passed promptly.

- Is there any research result regarding the average repayment period of securities lending transactions?

▲ Currently, it is limited to 12 months, and in Korea, most securities lending data can be considered within 12 months. About 90% of the transactions so far are within 12 months. There have been no significant problems with most securities lending transactions conducted so far.

- Are there other countries that impose period restrictions?

▲ Taiwan currently limits it to 18 months. However, Korea's current 12-month limit is stricter than other countries. Individual investors generally prefer shorter periods, while institutional and foreign investors tend to prefer longer periods. Compared to other countries, Korea's restriction is relatively strict, which is because we have relatively more institutional investors and have received more opinions in that regard.

- The plan to computerize securities lending transactions (real-time) as a solution to naked short selling seems to have been effectively discarded. Is that correct?

▲ I understand that there was talk of a real-time blocking system before. However, two major measures I mentioned earlier have been introduced. First, a representative case of illegal short selling is that it often happens unknowingly. Institutions conduct short selling in various places without checking how much they actually hold. In this regard, the internal balance management system we have prepared means that at least they should know and clearly understand their holdings.

Secondly, although we cannot block centrally, such measures were considered, but they are very costly, take a long time to build, and significantly prolong trading times. Real-time processing would take much longer than existing trading hours. Considering this, the current system collects data centrally and conducts a full inspection within three days, which is considered a highly effective system.

- For the Korea Exchange to independently calculate something, it needs its own data, but the basic data would be order details submitted by institutions. How can independent calculations be made from this?

▲ There is a clear designation of the short-selling management department, establishment of work rules, and record keeping. I think this will be well supplemented and applied to the internal management system to function properly. Regarding the central inspection system, the Korea Exchange has order details, and institutional investors report their data, but these two are not exactly the same. The purpose is to reconcile these two independent events, verify if they match exactly, and treat discrepancies as problems.

- Foreign investment banks (IBs) explained that they are only supplementing existing systems, so the costs are not astronomical. What is the situation for domestic firms?

▲ Regarding our internal balance management system and internal control standards, 80 domestic firms and 21 foreign IBs are included. These are companies that have recorded a short-selling balance of 0.0% or more at least once. Overall, about 92% are covered. Very small corporations are excluded from the institutional internal balance management system.

- Regarding penalties for illegal short selling, is it true that if the illicit gains exceed 5 billion KRW, life imprisonment is possible?

▲ There has been talk about life imprisonment related to sentencing, but life imprisonment is generally considered a difficult sentence to impose. It is interpreted as a possibility being left open only in cases of very intentional acts or socially significant disturbances. Generally, it is considered very difficult for life imprisonment to be imposed.

- Are there plans to communicate with the market, including foreign investors, before the resumption of short selling?

▲ I hope foreign investors do not view the time taken to prepare this system negatively. What we are trying to do is improve the system to block illegal short selling. Eliminating illegal short selling will establish a more transparent and clear market order. Preventing illegal short selling is a very important task. I hope you understand that the capital market will become more advanced through the establishment of this system.

- MSCI recently evaluated that Korea's short-selling accessibility is deteriorating. What is the Financial Services Commission's position on this? Also, please comment on the plan for inclusion in the MSCI developed market index.

▲ Being included in MSCI is certainly a good thing, but MSCI inclusion itself is not our policy goal. Our goal is to advance the capital market, and as a result, we expect to be included in MSCI. There has been some talk about short selling related to MSCI, but please understand that improving the system means moving toward a more advanced capital market. Since we mentioned March next year, I believe that the clear resumption will be evaluated when MSCI assesses next year.