Pass test to invest, South Korean regulator tells retail short sellers
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Pass test to invest, South Korean regulator tells retail short sellers 20 April 2021South Korea Reporter: Alex Pugh
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The South Korean financial regulator says the measures, designed to protect and enhance opportunities for retail investors to engage in securities lending and short selling announced in February, will come into effect from 3 May.
The Financial Services Commission (FSC) says 17 securities firms will provide securities lending services worth between KRW 2 trillion (USD 1.78 billion) and KRW 3 trillion (USD 2.67 billion), up from only six offering these services today.
An additional 11 will join the market throughout the year. The regulator expects a total of KRW 2.4 trillion (USD 2.15 billion) in securities will become available to lend for KOSPI 200 and KOSDAQ 150 stocks as of 3 May.
Unlike institutional or foreign investors, retail investors will be guaranteed a maximum 60 day period of stock borrowing.
The FSC has placed several guardrails on the financing and short selling markets for retail investors and erected several educational barriers to entry, which the regulator hopes will protect them from “excessive loss”.
Under the new rules, investors must have securities lending agreements with their trading firms and those without an account must create one.
Additionally, those with no investment experience must undertake mock trading programmes and educational exercises administered by the Korea Exchange (KRX) and the Korea Financial Investment Association, the FSC says.
How much cash retail investors can get their hands on will depend on their prior experience — total novices, for example, will be restricted to borrowing KRW 30 million (USD 26,936). The cap increases in line with an investor’s experience and is then removed for investors with more than two years of experience or those who are considered professional investors.
Retail investors are also subject to the restrictions from participating in a company’s capital increase via issuing new shares once the company has made such a plan public.
If an investor has shorted a company’s stock within the period of one day after the announcement of the company’s capital increase plan until the determination of the issuing price, the investor is not allowed to participate in the company’s capital increase.
A monetary penalty of up to 1.5 times the undue profit gained from violating this rule can be imposed.
Investors with net holding balance above a certain level due to short sale activities should report to the FSC and the KRX.
A monetary penalty of up to KRW 30 million (USD 26,936) can be imposed for violating this rule on each incident.
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