The Financial Services Commission held a meeting on November 5 where the authorities decided to ban all stock short selling in domestic markets (all KOSPI, KOSDAQ and KONEX listed items) effective from Monday, November 6, 2023 until the end of June 2024.

With the continuation of high interest rate environment and stagnant growth in the global economy, coupled with geopolitical risks such as the armed conflict between Israel and Hamas, there are growing uncertainties for the Korean economy. In particular, during the second half of this year, stock market volatility in domestic stock markets has risen to much higher levels compared to other major markets overseas, which caused anxiety in the market.

Despite a series of measures introduced in the past, recently, the authorities have discovered a number of illegal naked short selling practices conducted by foreign and institutional investors, raising concerns about the fair pricing function of domestic stock markets. Recently, a large-scale naked short selling case involving global investment banks was detected, and an investigation is currently taking place with discovery of additional unlawful activities. As such, the FSC finds that the situation with illegal short selling is very dire as it can erode the fair pricing function of the market and degrade confidence in the market. Therefore, considering the need to preemptively respond to the rising market uncertainties and address concerns about the potential weakening of the market’s fair pricing function, and with the practice of illegal naked short selling taking place in a more routine way, the FSC decided to ban short selling on all domestic stock items until the end of June next year.

Meanwhile, during the period of banning short selling, the government will work on proactive measures to improve the system in a way that will help to root out illegal short selling activities when short selling resumes thereafter. In this regard, first, the authorities will work on measures to level the playing field between institutional and retail investors. With the introduction of measures on short selling that extended the borrowed stock return period and lowered the collateral ratio for retail investors, the disparate conditions for borrowing stocks have been largely resolved. However, between retail investors and institutional investors, the playing field still remains not leveled, and the authorities will actively seek measures that will effectively address this problem.

Second, the authorities will look for an alternative way to prevent naked short selling before it takes place. While searching for an alternative to building a real-time illegal naked short selling detection and prevention system, the authorities will closely analyze the recent illegal short selling cases involving foreign and institutional investors and seek wide-ranging comments from market experts and stakeholders. Based on this, the authorities will look into various ways to prevent naked short selling and, if needed, seek legislation through close cooperation with the National Assembly.

Third, the authorities will step up efforts to detect and punish naked short selling activities. Since a large-scale naked short selling case involving global investment banks was recently detected, a special short selling investigation unit being launched on November 6 will thoroughly look into this sector. If there are additional illegal naked short selling activities found, the authorities will handle them with the principle of no tolerance to strictly punish them and root out such practices from the market. Moreover, the authorities will seek active cooperation with the National Assembly to strengthen penalties and diversify sanctions measures.

While short selling ban is in place, the government will promptly work on measures to improve the short selling system through close consultation with market experts and relevant institutions. Details about the improvement measures will be open to public discourse and the authorities will actively participate in the legislation process at the National Assembly.

At a media briefing held on November 5, FSC Chairman Kim Joo-hyun said that the top priority of the government’s capital market policy is to create a fair and efficient market to protect investors and ensure confidence in the market. In this regard, Chairman Kim said that the government will do all it can to bring improvements to the country’s short selling system, so that it can develop into one in which every investor can have confidence.