South Korea short selling ban on major indices ends
04 May 2021 South Korea
Image: stock.adobe.com/rudi1976
South Korean’s short selling ban was partially lifted yesterday, following tweaks over the past few months to regulations by the country’s Financial Services Commission (FSC).
Following the conclusion of the 14-month ban, the short selling of KOSPI 200 and KOSDAQ 150 stocks resumed on 3 May. But the government says it will keep a close eye on the market and apply strict sanctions on any “market disturbances”.
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 said in February.
The move comes after the FSC amended the Enforcement Decree of the Financial Investment Services and Capital Markets Act in April — what the FSC calls “necessary improvements to the system” — with stricter penalties for naked short selling.
The South Korean financial regulator said the measures, designed to protect and enhance opportunities for retail investors to engage in securities lending and short selling, would come into effect on the same day large-cap short selling was allowed to resume — 3 May.
The enhanced penalties and monitoring mechanisms have introduced new penalties on illegal short sale activities, new record-keeping requirements on securities lending agreements and restrictions on short sellers’ participation in capital increase.
In a boost for retail investors, the 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 prior to yesterday.
An additional 11 will join the market throughout the year, the regulator expected a total of KRW 2.4 trillion (USD 2.15 billion) in securities would become available to lend for KOSPI 200 and KOSDAQ 150 stocks by 3 May.
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 and the Korea Financial Investment Association, the FSC says.
In anticipation of the ban coming to an end, the Pan Asia Securities Lending Association (PASLA) said last week: “The partial resumption of short selling in South Korea is a step in the right direction. It makes the market more accessible for global investors, many of whom have found it difficult to allocate capital to South Korea without being able to hedge their portfolios through covered short-selling.
“PASLA also welcomes the FSC’s moves to facilitate wider participation in securities lending and short selling, which will add further liquidity to South Korean equities. Regulated, transparent and covered short selling results in more efficient and resilient markets, benefiting all participants and economies as a whole.
“We look forward to the full resumption of short selling soon, as we have seen in other markets that enacted temporary bans.”
For securities lending market participants the resumption of short selling is expected to revive lacklustre returns for the South Korean market, which has previously provided a rich seam relative to other Asia Pacific 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.
Following the conclusion of the 14-month ban, the short selling of KOSPI 200 and KOSDAQ 150 stocks resumed on 3 May. But the government says it will keep a close eye on the market and apply strict sanctions on any “market disturbances”.
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 said in February.
The move comes after the FSC amended the Enforcement Decree of the Financial Investment Services and Capital Markets Act in April — what the FSC calls “necessary improvements to the system” — with stricter penalties for naked short selling.
The South Korean financial regulator said the measures, designed to protect and enhance opportunities for retail investors to engage in securities lending and short selling, would come into effect on the same day large-cap short selling was allowed to resume — 3 May.
The enhanced penalties and monitoring mechanisms have introduced new penalties on illegal short sale activities, new record-keeping requirements on securities lending agreements and restrictions on short sellers’ participation in capital increase.
In a boost for retail investors, the 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 prior to yesterday.
An additional 11 will join the market throughout the year, the regulator expected a total of KRW 2.4 trillion (USD 2.15 billion) in securities would become available to lend for KOSPI 200 and KOSDAQ 150 stocks by 3 May.
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 and the Korea Financial Investment Association, the FSC says.
In anticipation of the ban coming to an end, the Pan Asia Securities Lending Association (PASLA) said last week: “The partial resumption of short selling in South Korea is a step in the right direction. It makes the market more accessible for global investors, many of whom have found it difficult to allocate capital to South Korea without being able to hedge their portfolios through covered short-selling.
“PASLA also welcomes the FSC’s moves to facilitate wider participation in securities lending and short selling, which will add further liquidity to South Korean equities. Regulated, transparent and covered short selling results in more efficient and resilient markets, benefiting all participants and economies as a whole.
“We look forward to the full resumption of short selling soon, as we have seen in other markets that enacted temporary bans.”
For securities lending market participants the resumption of short selling is expected to revive lacklustre returns for the South Korean market, which has previously provided a rich seam relative to other Asia Pacific 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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