National Pension Service Stops Lending Stocks to Short Sellers

The National Pension Service (NPS) has decided to stop lending stocks to short sellers as criticism mounts against it.

Kim Sung-joo, chairman of the National Pension Corporation, said on Oct. 23, “We have stopped lending stocks from Oct. 22 after an internal discussion.” He added, "We plan to collect the already extended stocks by year's end in consideration of the contractual relationship with borrowers."

Kim made the remarks at a parliamentary audit of the NPS held at its headquarters in Jeonju, North Jeolla Province.

Stock lending is a form of financial investment widely used at home and abroad. It is a legitimate trading technique under the current Korean law. The NPS has been lending stocks since April 2000 to generate stable profits.

According to data submitted by Rep. Kim Sang-hee of the ruling Democratic Party, the domestic market for stock loans was worth 66.4 trillion won (US$58.4 billion) a day on average in 2017, with the NPS accounting for 0.68 percent.

The NPS earned 13.8 billion won in profits from stock lending last year and 62.1 billion won in the past four years from 2014 to 2017.

Although the NPS’ share of the stock lending market is less than 1 percent, concerns over its involvement in it have been raised continuously. Critics argued that the stocks extended by the NPS are used by short sellers as seed money. They also noted that if stock prices fall due to short selling, it would more than offset the gains that the NPS earns through stock lending.

Short selling refers to selling a security that the seller has borrowed. The seller pays back the security when its price falls. The trading method is based on the belief that a security’s price will decline in the future.

In response to criticisms against stock lending, the NPS has until recently said that it is simply using a trading technique that is allowed by the domestic capital market. It also noted that its share of the market is not large enough to disrupt the stock market.

However, the decision seems to have been made as public criticism continues to mount. Tens of thousands of people have participated in the petition posted on Cheong Wa Dae's bulletin board to ban stock lending.

Kim also pointed out during the parliamentary audit that if the NPS continues to lend stocks despite public opposition, it would be tantamount to losing 40 billion won in public trust.