On May 29, 2018, the Financial Services Commission (“FSC”) announced its plan to improve short sale regulations.

In light of the recent events, such as the incident involving non-existing shares that were sold by a “fat finger,” or naked shares that were sold into the market, Korea has been seeing an increase in the number of proponents advocating for the ban on short selling.  Despite the rising public distrust against short selling, since short selling is a globally accepted practice and promotes market efficiency, the FSC has decided to strengthen regulation and oversight over short selling rather than banning it altogether.

Details:

The FSC’s proposed plans include the following: 

• Increase accessibility of retail investors to short sales.
• Impose confirmation obligations to securities companies, and have them confirm that the relevant stock has actually been borrowed.
• Strengthen verification functions related to short sales by linking them with the stock trades/balances monitoring system, which will be developed separately.
• Strengthen detection of short sale violations by developing a market surveillance system.
• Establish a team dedicated to investigating violations of short sale regulations. 
• Submit an amendment proposal to the National Assembly by the end of the year to adopt stricter criminal sanctions, and impose heavier administrative fines for violations of short sale regulations.

Significance:

Securities companies will need to enhance their internal control systems and review their current transactions in light of the new regulatory regime.  In particular, since the regulators have signaled their intention to investigate whether short sale orders and executions comply with the regulations, and impose heavier sanctions for any violations for releasing distrust, companies engaging in short sale transactions should thoroughly review their short sale procedures.