Mandatory Measures to Prevent Naked Short Selling
Fines Up to 100 Million KRW for Violations
Unified Short Selling Trading Conditions for Individuals and Institutions
Financial authorities are accelerating the legislative and institutional preparations ahead of the resumption of short selling on March 31 next year. They have mandated short selling without borrowing prevention measures for corporations and securities firms, imposing fines of up to 100 million KRW and sanctions for violations. Short selling trading conditions will also be standardized to ensure that individual investors are not disadvantaged compared to institutional and corporate investors, with fines established for violations.
On the 21st, the Financial Services Commission announced that it will publicly notify the draft amendments to the Enforcement Decree of the Capital Markets Act and the Financial Investment Business Regulations related to these short selling system improvements until the 31st of next month. Afterward, the amendments will undergo review by the Regulatory Reform Committee and the Ministry of Government Legislation, followed by approval from the Securities and Futures Commission, the Financial Services Commission, the Vice Ministerial Meeting, and the Cabinet Meeting, and will take effect from March 31 next year.
According to the amendments, corporations intending to short sell listed stocks must establish internal control standards to prevent naked short selling. After the resumption of short selling, corporations subject to reporting?those with short selling balances of 0.01% or 1 billion KRW or more?and institutional investors such as market makers and liquidity providers must manage balances by stock and build a short selling IT system capable of blocking naked short selling. The targeted institutional investors include 19 foreign investment banks (IBs), 31 securities firms, 45 asset management companies, and 2 other financial firms, totaling 97 entities.
These entities must submit daily stock-specific balance information to the exchange within two business days so that the exchange can conduct a full inspection of naked short selling through the central inspection system (NSDS). However, if the borrowed listed stocks are pre-deposited in the account before placing short selling orders, eliminating the possibility of naked short selling, the obligation to build a short selling IT system is waived.
Securities firms entrusted with short selling orders from corporations must verify annually whether the corporation has established internal control standards and IT systems, and report the results to the Financial Supervisory Service within one month. Securities firms must also report their own naked short selling prevention measures, confirmed by a department independent from short selling operations, to the Financial Supervisory Service. Corporations and securities firms violating naked short selling prevention measures will be fined up to 100 million KRW, and institutional investors such as securities firms may face sanctions on their institutions and executives.
The repayment period for lending transactions for short selling purposes by institutional investors and the lending service for individual investors will be unified at 90 days, with a maximum extension of 12 months. Previously, institutional investors had no specific repayment period for lending transactions, while individual investors were limited to a 90-day repayment period for lending services, leading to criticism that individual investors were disadvantaged. Fines for violating the repayment period limit are 100 million KRW for corporations and 50 million KRW for individuals.
Investors who short sell during the period from the public announcement of the issuance of convertible bonds (CB) or bonds with warrants (BW) until the day the pre-issuance conversion price or exercise price is announced will be prohibited from acquiring CBs or BWs. Exceptions apply if the investor purchases a quantity exceeding the amount short sold during the relevant period.
Short selling orders executed on alternative trading systems (ATS), scheduled to launch in the first half of 2025, will also be subject to the same short selling disclosure obligations as those on the exchange.
The Financial Services Commission stated, "We will ensure that the improved system is smoothly implemented by the end of March next year in cooperation with related organizations, and will proceed without delay in building the short selling IT system so that short selling can be resumed."
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