On Nov. 7, the second day of the complete ban on short selling, the KOSPI index fell by 2.33 percent, and the KOSDAQ index dropped by 1.80 percent.
Even on the second day of the government’s complete ban on short selling, controversy continues in the securities market.
According to financial authorities, when comparing South Korea’s short selling regulations to major advanced countries, one of the most prominent differences is the collateral requirement for individuals and institutions. In South Korea, institutions and foreign investors face a 105 percent collateral requirement, while individuals are subject to a 120 percent requirement. In financial advanced countries such as the United States at 150 percent, Japan at 130 percent, and Singapore at 120 percent, the collateral requirement is the same for both individuals and institutions. Hong Kong allows brokerage firms to set collateral ratios on a per-contract basis, making South Korea the only country differentiating between individual investors and institutions in this regard.
In terms of the loan repayment period for short selling, South Korean individual investors have an advantage compared to some other countries. In South Korea, individuals can renew their lending agreements every 90 days. While there is no official limit on the number of renewals by system, securities firms often operate with detailed regulations, including a maximum one-year limit. This is more favorable for individual investors compared to Japan and Taiwan, where stocks borrowed for short selling must be returned within 180 days.
Domestic institutions in South Korea have a repayment period that can be renewed every three to six months with a maximum renewal period of one year. Additionally, institutions are obligated to accept the borrower’s recall request unconditionally.
The crackdown on illegal naked short selling has two sides to consider. The standards defining what is illegal are stricter in South Korea compared to major countries, but the penalties for violations are relatively lenient. South Korea, along with other major countries, categorizes “naked short selling,” where stocks are sold without borrowing them, as illegal. In South Korea, a transaction is considered legal only when borrowing is completed or a formal borrowing agreement has been made.
The penalties in South Korea are relatively lenient. Although regulations were strengthened in April 2021 to allow for sentences of one year to 30 years of imprisonment, which can extend to 50 years in aggravated cases, for those attempting illegal short selling, there have been no reported instances of criminal penalties being imposed. Furthermore, the system of imposing fines based on the order amount has yet to yield any documented cases.
In contrast, the United States imposes fines of up to US$5 million or imprisonment of up to 20 years for naked short selling. Fines are often set at ten times the unjust gains. The United Kingdom, on the other hand, does not have an upper limit on fines for such violations.