Starting from Monday, South Korea will reintroduce a prohibition on short-selling of shares, with the restriction set to remain in place at least until June. This move is aimed at creating a fair and equitable trading environment for both retail and institutional investors, as announced by financial authorities on Sunday.
The ban on short-selling was lifted in May 2021 for trades involving shares of companies with significant market capitalization included in the KOSPI200 and KOSDAQ150 share price indices. However, this restriction has continued to apply to most other stocks.
Short-selling involves selling borrowed shares to repurchase them at a lower price, thereby profiting from the price difference.
According to Financial Services Commission (FSC) Chairman Kim Joo-hyun, the measure is intended to address and rectify the fundamental imbalance in the trading environment between institutional and retail investors.
Kim stated that in light of the ongoing uncertainty in financial markets, major foreign investment banks have, as a customary practice, been involved in unfair trading activities. He also emphasized that it had become unfeasible to uphold equitable trading discipline. He also mentioned that the FSC plans to assess market conditions in June to determine if there has been substantial improvement that would permit the lifting of the ban.
The regulatory authority announced last week that it would form an investigative team to examine the short-selling practices of foreign investment banks for potential unlawful activities, including what is known as naked short-selling. In South Korea, the practice of naked short-selling, where investors short-sell shares without first securing borrowing arrangements or verifying their availability for borrowing, is prohibited.
In October, the FSC announced its intention to impose fines on two Hong Kong-based investment banks that were found to have been involved in naked short-selling transactions, amounting to 40 billion won ($29.58 million) and 16 billion won, respectively.
Previously in the same year, the regulatory authority had already imposed fines on five foreign companies, including Credit Suisse, for their involvement in naked short-selling.
Various officials and market observers have pointed out that addressing the uncertainty surrounding short-selling regulations is one of the critical issues that must be resolved for influential index provider MSCI to consider upgrading South Korea to developed-market status.