As summarized in our previous newsletters (see below), Korean financial regulators have announced various regulatory changes and plans to strengthen the enforcement of short sale rules.
 

• Strengthened investigation and punishment of illegal short sales & improvement of short sale system.  (Link)

• Amendment to the Financial Investment Business Regulation relating to short sale.  (Link)

• Public disclosure of the names of the persons subject to administrative penalty for short sale rule breach or market disruption activity.  (Link)
   

We expect that the regulators will maintain their focus on strengthening the investigation and punishment of illegal short sales this year.  The following is a summary of the plans announced by Korean regulators and the exchange to reinforce the short sale rules and related systems in 2023.

Financial Services Commission (“FSC”)

The FSC’s annual Key Work Implementation Plan for 2023, which was announced on January 30, 2023, includes a proposed amendment of the Financial Investment Services and Capital Markets Act to introduce new measures for those that receive an administrative penalty for breach of market disruption regulations or short sale rules.  Such measures include prohibition on certain transactions (e.g., execution of new transactions involving financial investment products, new account opening) and disqualification for serving as an officer of a listed company for up to ten years.   

Financial Supervisory Service (“FSS”)

In its annual Work Plan for 2023 (the “FSS Work Plan”) announced on February 6, 2023, the FSS proposed to more closely monitor short sale trades by implementing a new securities lending transaction reporting system, which will impose obligations to report the balance of borrowed securities and the stock borrowing for short sale purposes for 90 days or longer.  In addition, the FSS Work Plan calls for an overall examination of the securities companies’ management and operation of aggregation units (e.g., independence of personnel and operation, details of the securities trading and lending and borrowing), and, if necessary, introduction of improvement measures.  The FSS also indicated that it plans to increase its enforcement activities with regard to market manipulation and insider trading activities which involve the use of OTC swap transactions such as TRS and CFD and short positions.

The Short Sale Investigation Team at the FSS, which was newly established in 2022, is currently monitoring and investigating several short sale cases, focusing on institutional investors and brokers which frequently engaged in or intermediated short sale trades.  As reported by the media, the Short Sale Investigation Team is conducting investigations not only on naked short sale trades but also on market disruption cases involving short positions (e.g., execution of short sale or short swaps after receiving information on pending block trade).

Korea Exchange (“KRX”)

The KRX announced on January 31, 2023 their plan to implement the following measures to strengthen its monitoring of illegal short sales: (i) shortened inspection period for short sale breaches from over one week to two days; (ii) enhanced information sharing with the foreign authorities and (iii) implementation of a new process to prohibit market participation by persons that commit unfair trade practices for up to 10 years (i.e., ban on new trading of financial investment product and new account opening).

The continued focus on strengthened monitoring and enforcement of short sale regulations in 2023 highlights the importance of having in place enhanced compliance systems and controls to prevent breaches of short sale rules.