KOREAN REPUBLIC: FSC increase regulation on Short-Selling

Friday November 11 2016

The Financial Services Commission (FSC) has outlined plans to improve rules for short selling and disclosure to strengthen investor protection.

This follows Hamni’s (a domestic pharmaceutical) late posting after short selling a large volume of stock caused controversy in the domestic stock market, as the company posted both favourable and unfavourable announcements within two days.

The FSC have indicated that the following changes will be introduced:

• Short sellers shorting during the period between the date when the paid-in capital increase is publicly announced and the date when issue prices of stocks are decided will be barred from buying the newly-issued stocks (to be implemented Q1 2017);
• KRX will designate “overheated short-selling stocks” at the close for stocks showing extraordinary increases in short selling and sharp falls in prices during the trading hours to prohibit short-selling for those stocks on the following day. Shares will be considered over-heated when three conditions are met:
  (i) the volume of a company`s short-sold shares accounts for more than 20 percent of the company`s overall volume of trade in the session;
  (ii) the company`s closing price in a session declines by more than 5 percent from the previous session; and
  (iii) the proportion of the company`s short-sold shares increased by 100 percent from the average of 40 previous sessions.
• Sanctions for short-selling violations will be strengthened:
  (i) Breaches of prohibitions of uncovered short- selling or up-tick rules will be subject to heavier fines than those imposed on other short-selling violations. (regulation to be revised Q1 2017); and
  (ii) The use of short-selling to manipulate prices will be added to types of ‘Market Disruptive Activities’ under the Financial Investment Services and Capital Markets Act. (Amendment proposal for the Financial Investment Services and Capital Markets Act will be submitted to the National Assembly in Q1 2017)
• Deadlines for disclosure of significant short positions will be shortened from the current T+3 days to T+2 days. (Relevant regulations to be implemented in Q4 2016).

The FSC has additionally indicated that maximum penalties for violation of disclosure rules will be raised by a multiple of 5 (KOSPI: KRW 200 million to KRW 1 billion, KOSDAQ: KRW 100 million to KRW 500 million) to hold companies more accountable for accurate and timely disclosure. (to be implemented in Q4 2016).

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