The government and the People Power Party will unify lender repayment periods and collateral ratios for individual and institutional investors as a follow-up to a temporary short-selling ban.
The government and the ruling party held a meeting with market experts on Nov. 16 to gather opinions on the measures, said Yoo Eui-dong, chairman of the People Power Party’s Policy Committee, in a briefing.
First of all, the government and the People Power Party set 90 days as the repayment period for loan transactions by institutions that require mid-term repayment. The 90 days are the same as for individual lending services, but the period can be extended.
The collateralization ratio for individual lenders (currently 120 percent) will also be lowered to 105 percent, the same as for institutional and foreign lenders. Previously, individual investors were required to maintain a ratio of at least 120 percent of the total amount of collateral to the amount of shares borrowed in short selling, while institutional and foreign investors were subject to 105 percent, which has been criticized as an unlevel playing field.
The government and the People Power Party also discussed mandating internal computer systems and internal control standards for institutional investors to prevent borrowing-free short selling in advance. “Regarding a system that completely blocks borrowing-free short selling externally in real time, we will further examine the feasibility and alternatives of establishing such a system with the Financial Supervisory Service and exchanges taking the lead,” Yoo said.
The Korean financial authorities plan to intensively investigate and crack down on illegal short selling while also checking the legality and appropriateness of market makers and liquidity providers. The government and the People Power Party have decided to diversify sanctions and increase the level of punishments for illegal short sellers, such as restricting stock trading and the appointment of those who responsible for illegal short selling as executives.
“In addition to what has been revealed in illegal short-selling investigations, we are looking into at least three or four companies internally with specific cases,” said Lee Bok-hyun, head of the Financial Supervisory Service. “In terms of overseas markets, we are cooperating with cooperative supervisory authorities such as those in Hong Kong.”
“We are planning to run a task force to get opinions on how the Korea Exchange and the Financial Supervisory Service will run computerized systems,” Lee said, regarding the establishment of a real-time computerized system for short selling. “We are keeping various possibilities open.”
Earlier, the government and the People Power Party decided to temporarily ban short selling until the first half of next year and improve the system, saying the current short-selling system is an unlevel playing field for individual and institutional investors.