Retail, institutional investors to be subject to same rules for short selling

The Korea Times

The Korea Times

Finance

Sat, December 9, 2023 | 23:38

Economy

Retail, institutional investors to be subject to same rules for short selling

Posted : 2023-11-16 17:27

Updated : 2023-11-17 15:00

Financial Supervisory Service (FSS) Governor Lee Bok-hyun, second from right, sits next to Financial Services Commission (FSC) Vice Chairman Kim So-young, third from right, during a consultative meeting among the ruling People Power Party, the government and the financial industry at the National Assembly in Seoul, Thursday. Yonhap

Ruling party, financial authorities to create level playing field in short selling system

By Anna J. Park

The ruling People Power Party and financial authorities have announced plans to apply the same conditions for the local short selling system for both retail and institutional investors.

The move is seen as the ruling party and government's joint response to a long-held complaint by individual investors that the local short selling system creates an unlevel playing field due mainly to differentiated rules of collateral ratio and periods of borrowing stocks applied to retail and institutional investors.

“We decided to create more favorable conditions for individuals in the short selling trading system," said Rep. Yu Eui-dong, the head of the ruling party's policy committee.

According to a draft plan unveiled during Thursday's consultative meeting, the repayment period for borrowed stocks used in short selling for both individual and institutional investors will be the same at 90 days plus alpha — an extension option allowed.

So far, individual investors have complained that foreign and institutional investors have an indefinite repayment period, which they can extend anytime through mutual agreement when borrowing stocks.

In addition, the loan-to-collateral ratio for individual investors — currently 120 percent — will also be lowered to 105 percent, the same as that for institutions and foreigners.

It was also a point of major criticism by retail investors, who cry foul over the current ratio of 120 percent applied to individual investors. They say this is discriminatory, as it means retail investors should hold more collateral than foreign or institutional investors, who are subject to the 105 percent rule, when it comes to short selling transactions.

The draft plan also includes an obligatory system setup that entirely prohibits naked short selling on institutional investors' internal computing systems. Further discussion will follow on whether such plans could be feasible.

The proposed plan will be confirmed after additional consultations between the ruling party and government. Financial Services Commission (FSC) Vice Chairman Kim So-young said during the meeting, “If the short selling system is not improved sufficiently, we will extend the short selling ban further.”

Financial Supervisory Service (FSS) Governor Lee Bok-hyun vowed to strengthen penalties for those who violate short selling regulations.

"On top of what was revealed externally in the investigation of illegal short selling, the FSS is investigating three to four other companies internally against their short selling violations," Lee said during the meeting. "The FSS is also closely cooperating with overseas authorities, such as Hong Kong."

Earlier this month, financial authorities announced a complete, temporary ban on short selling, which will continue until the first half of next year. The government vowed to take drastic measures to root out illegal short selling practices during the hiatus.

annajpark@koreatimes.co.kr