South Korean financial authorities have decided to strengthen short selling regulations by revising the Capital Market Act.
The new rules will make illegal short sellers subject to imprisonment and fines that are 1.5 times higher than the undue profits that they earned through illegal trading.
The Financial Services Commission (FSC) disclosed the plan in a document submitted to the National Policy Committee of the National Assembly on October 11. “The amendment bill is currently pending at the National Assembly and we are also seeking to toughen punishment for violators of the short selling regulations,” it said.
The FSC is now considering measures to impose severe punishment on illegal short selling, such as imprisonment for up to 10 years and fines that are 1.5 times higher than the gains earned through illegal shorting selling.
It is also planning to use a system that monitors the balance of stocks and the amount of stocks sold and bought to quickly detect illegal short selling cases. The system has been established following Samsung Securities’ dividend incident. The financial regulator is in discussion with the Ministry of Justice to introduce a strengthened fine system for unfair trading practices.
In a parliamentary audit session on the same day, Democratic Party lawmaker Kim Byung-wook pointed out that the short selling market is almost exclusively used by foreign investors. He also noted that there is great concern over naked short selling.
In this regard, FSC Chairman Choi Jong-ku said, “We currently have the system to identify whether it is naked short selling or covered short selling. We are now banning naked short selling and punishing violators. South Korea has relatively strong short selling regulations compared to other countries. Most of short selling regulatory systems implemented by advanced countries are already in place here. South Korea has a low share of short selling transactions compared to other countries. We will strengthen monitoring on short selling violations and continue to raise the level of sanctions.”
According to the FSC, a total of 550 stocks with a sudden and abnormal increase of short selling over a trading day have been designated as “overheated short-selling stocks” by the Korea Exchange until August this year after the system has been introduced in March last year. In particular, the monthly average number of cases has increased from 3.2 to 45.8 since the overheated short-selling stock designation standards have been strengthened in September last year.