Strengthened Investigation and Punishment of Illegal Short Sales and Measures to Enhance Short Sale Regulations

On July 28, 2022, the Financial Services Commission, the Supreme Prosecutors′ Office, the Financial Supervisory Service (the "FSS") and the Korea Exchange (the "KRX") held an inter-agency meeting and announced their plans to strengthen the enforcement of short sale rules and punishment of illegal short sales and to improve the short sale regulations. (Official press releases can be found here).

The plans announced in the official press releases (the "Press Release") are in response to President Yoon's request on July 27, 2022 to come up with measures to eradicate illegal activities involving short sale trades. The Press Release is expected to be followed by swift actions strengthening of the oversight and punishment of illegal short sales and changes in the short sale regime in Korea.

In relation to the strengthened oversight and punishment of illegal short sales, the FSS announced its detailed plans, including special investigations of unfair trade practices involving short sales, expedited investigation of the cases transferred from the KRX, vigorous imposition of administrative fines, and active responses through the fast track process.* The Supreme Prosecutors' Office indicated that it plans to actively utilize the fast track process in close coordination with the Securities Crime Joint Investigation Team of the Seoul Southern District Prosecutors' Office and vigorously enforce short sale rules by commencing investigations in a timely manner and imposing severe penalties for short sale violations including seizure of criminal proceeds. In addition, the KRX plans to conduct thematic audits with respect to short sale trades involving stocks with excessive trading volume, stocks included in indices and public disclosure of material negative information, and also check the short sale process and internal controls of the securities firms which engage in large volume short sale trades.

*Fast track process: This process allows prompt commencement of a criminal investigation of unfair trading cases and makes mandatory investigative measures such as search and seizure available at an early stage of the investigation.

The key measures announced in the Press Release to monitor and penalize illegal short sales and to improve the short sale system in Korea are as follows:

Strengthened investigation and punishment of illegal short sales

Improvement of short sale system

Active investigation of unfair trading practices involving short sale
- Selection of investigation issues and stocks subject to investigation, and immediate commencement of investigations upon identification of potential issues
Prompt investigation of naked short sales
- Implementation of periodic review of short sale cases and prompt commencement of investigations
- Review of short sale order process of (foreign) securities companies
Strict investigation and punishment
- Establishment of an inter-agency information sharing system for illegal short sale investigations
- Active utilization of the fast track process in close coordination with the Securities Crime Joint Investigation Team of the Seoul Southern District Prosecutors' Office; imposition of maximum penalties for serious violations; seizure of criminal proceeds and concealed property
Establishment and expansion of investigation teams dedicated to illegal short sale cases
- Expansion of the dedicated investigation teams within the KRX and the FSS

Strengthened monitoring of long-term and large-scale short sale investors
- Obligation to report detailed information on the stock borrowing by investors who engage in long-term (over 90 days) stock borrowing or large-scale short sale trades (the reported information can be used for investigation by the KRX, the FSS and the Prosecutors' Office)
Expansion of the system to designate excessive short selling stocks
- Establishment of a new standard for identifying stocks with excessive short sale (30% or more) (expected to increase the number of stocks designated as excessive short selling stock by 13.8%)
- If the stock price falls by 5% or more while the stock is designated as excessive short selling stock and subject to temporary short sale ban, the period of short sale ban will be automatically extended. (expected to increase the aggregate number of days during which the ban is effective by 15.4%)
Fair opportunities to retail investors
- Decrease in the collateral ratio for retail investors' short sale trades (140%→120%)
- Promote the stock borrowing without maturity for retail investors who qualify as professional investors

The measures intended to strengthen investigation and punishment of illegal short sales described in the above table will be implemented immediately, while the measures that require amendments to relevant laws and/or regulations are scheduled to be implemented within this year as follows:

3^rd quarter of 2022
- Improvement of the excessive short selling stock designation system (through amendments to relevant detailed rules of the KRX)
4^th quarter of 2022
- Strengthen monitoring of the stock borrowing transactions, such as the introduction of (i) mandatory reporting requirements for the lending/borrowing transactions for 90 days or longer and (ii) inclusion of the information on stock borrowing in the net short position reports (through amendments to the Financial Investment Business Regulations)
- Decrease in the collateral ratio for retail investors’ short sale trades (through amendments to the Financial Investment Business Regulations and changes to the IT systems of securities firms)

[Korean version]

Share

Professionals

Professionals