South Korea Temporarily Bans Stock Short Selling to Curb Illegal Activities

South Korea's financial regulator announced on Sunday that it will enforce a temporary ban on stock short selling until the second half of next year. The move comes as part of a crackdown on illegal short-selling by global investment banks (IBs).

Starting from Monday, the ban will be in effect until July 2024, according to the Financial Services Commission (FSC), which would assess whether significant improvements in the market activity would be achieved by June that could potentially lead to the lifting of the ban.

Measures to Create a Level-Playing Field

Yonhap News Agency reported that this temporary ban aims to address concerns surrounding "the tilted playing field" between institutional and retail investors, stated Financial Services Commission (FSC) Chairman Kim Joo-hyun during a news briefing. By curbing unfair trades, the FSC hopes to fundamentally ease the disparities in the market.

There are concerns regarding the fair pricing of stocks in the local stock market, according to Reuters. Despite previous efforts to improve the system, the regulators note that illegal naked short selling by foreign and institutional investors has continued to undermine fair trading and market integrity.

The regulator plans to review market activity in June to determine whether significant improvement has been achieved, which could lead to lifting the ban.

Concerns Over External Uncertainties, Illegal Activities

The financial regulatory bodies have drawn attention to the "growing external uncertainties" that have impacted the domestic market, such as the recent war between Israel and Hamas. These factors have raised concerns over the fair pricing of stocks, as illegal naked short selling by foreign and institutional investors continues to be exposed despite previous efforts to enhance the trading system.

To tackle illegal activities in the market, the regulatory authorities have established a team of investigators dedicated to probing short-selling by foreign investment banks. The investigation will particularly focus on prohibited practices such as naked short-selling, where investors engage in short-selling without borrowing or determining the availability of shares for borrowing.

In October, the Financial Supervisory Service announced its intentions to fine two Hong Kong-based investment banks for engaging in naked short-selling transactions. The fines, amounting to 40 billion won ($29.58 million) and 16 billion won, respectively, will be imposed on the violators. Notably, the regulator had earlier fined five foreign firms, including Credit Suisse, for their involvement in naked short-selling activities.

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