South Korea extends short selling ban
04 February 2021 South Korea
Image: Engdao/adobe.stock.com
South Korea’s Financial Services Commission (FSC) has extended its short selling ban again amid pressure from politicians and retail market participants to curb bearish trading.
A short selling ban was imposed on KOPSI, KOSDAQ and KONEX indexes in March 2020 as equities prices tumbled in reaction to the first spread of COVID-19 infections across the country, and, after two extensions, was due to sunset in March.
FSC chair Eun Sung-soo has now confirmed the ban will remain until 2 May, at which point short selling may resume on KOSPI 200 and KOSDAQ 150 stocks. The date was chosen to give the Korea Exchange time for system development and testing, the commission says.
KOSPI 200 makes up 22 per cent of a total of 917 stock items, while KOSDAQ 150 makes up 10 per cent of a total of 1470 stock items.
At a press conference this week, Sung-soo explained the partial resumption will minimise the impact on markets, as these stocks have large market caps and liquidity so that the resumption of short-selling would have limited impact on stock prices.
Meanwhile, the short selling ban will hold on the remaining 2,037 smaller stock items until favourable market conditions allow for its reintroductions without disruption, the FSC says.
The decision to extend the ban again comes alongside a political campaign to revise the Financial Investment Services and Capital Markets Act to introduce harsher penalties for illegal short selling activities, including the threat of prison time and fines.
The FSC notes the revised act will come into effect on 6 April, meaning the extension will mean “there will be no issue of a legislative gap”.
The revisions include requiring short sellers to keep their securities lending data for five years, while securities firms must actively tighten their monitoring of illegal short selling activities.
Commenting on the latest extension, the Pan Asia Securities Lending Association (PASLA) says: "While it is disappointing that the short selling ban has been extended again, the partial resumption on 3 May will be a welcome step towards opening up the market again for global investors.
“However, these extensions to the ban have created uncertainty about Korea’s commitment to allowing regulated, transparent and covered short-selling, which is an important characteristic of high-quality equity markets globally and a vital investment and risk management tool.”
PASLA notes that losers from the ban include those who want to be long-term shareholders in South Korean companies but struggle to allocate capital to the market unless they can hedge their portfolios through covered short selling.
“We stress that, in the long term, markets that permit regulated short-selling should be more liquid, more resilient and better positioned to support economic growth and prosperity,” the trade body adds.
The ban will be unwelcome news for the region’s securities lending market participants as South Korea’s lending revenue in 2020 unsurprisingly fell well below its usual levels as one of Asia Pacific’s most profitable markets.
IHS Markit data shows equity lending in South Korea only reached $237 million in 2020, a 45.6 per cent decrease compared to the year before. Lending revenue was down more than 75 per cent in each month of Q4 2020, peaking at an 81 per cent year-on-year decrease in November.
A short selling ban was imposed on KOPSI, KOSDAQ and KONEX indexes in March 2020 as equities prices tumbled in reaction to the first spread of COVID-19 infections across the country, and, after two extensions, was due to sunset in March.
FSC chair Eun Sung-soo has now confirmed the ban will remain until 2 May, at which point short selling may resume on KOSPI 200 and KOSDAQ 150 stocks. The date was chosen to give the Korea Exchange time for system development and testing, the commission says.
KOSPI 200 makes up 22 per cent of a total of 917 stock items, while KOSDAQ 150 makes up 10 per cent of a total of 1470 stock items.
At a press conference this week, Sung-soo explained the partial resumption will minimise the impact on markets, as these stocks have large market caps and liquidity so that the resumption of short-selling would have limited impact on stock prices.
Meanwhile, the short selling ban will hold on the remaining 2,037 smaller stock items until favourable market conditions allow for its reintroductions without disruption, the FSC says.
The decision to extend the ban again comes alongside a political campaign to revise the Financial Investment Services and Capital Markets Act to introduce harsher penalties for illegal short selling activities, including the threat of prison time and fines.
The FSC notes the revised act will come into effect on 6 April, meaning the extension will mean “there will be no issue of a legislative gap”.
The revisions include requiring short sellers to keep their securities lending data for five years, while securities firms must actively tighten their monitoring of illegal short selling activities.
Commenting on the latest extension, the Pan Asia Securities Lending Association (PASLA) says: "While it is disappointing that the short selling ban has been extended again, the partial resumption on 3 May will be a welcome step towards opening up the market again for global investors.
“However, these extensions to the ban have created uncertainty about Korea’s commitment to allowing regulated, transparent and covered short-selling, which is an important characteristic of high-quality equity markets globally and a vital investment and risk management tool.”
PASLA notes that losers from the ban include those who want to be long-term shareholders in South Korean companies but struggle to allocate capital to the market unless they can hedge their portfolios through covered short selling.
“We stress that, in the long term, markets that permit regulated short-selling should be more liquid, more resilient and better positioned to support economic growth and prosperity,” the trade body adds.
The ban will be unwelcome news for the region’s securities lending market participants as South Korea’s lending revenue in 2020 unsurprisingly fell well below its usual levels as one of Asia Pacific’s most profitable markets.
IHS Markit data shows equity lending in South Korea only reached $237 million in 2020, a 45.6 per cent decrease compared to the year before. Lending revenue was down more than 75 per cent in each month of Q4 2020, peaking at an 81 per cent year-on-year decrease in November.
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Korea exchange launches task force in pursue illegal short selling crackdown
Korea exchange launches task force in pursue illegal short selling crackdown
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