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Short selling ban

Korea’s ruling party seeks to extend short-selling ban, revise relevant rules

Aug 17, 2020 (Gmt+09:00)

South Korea’s ruling party is pursuing an extension of the temporary short-selling ban set to expire mid-September. It is simultaneously preparing to revise relevant rules, in efforts to reduce market volatility when the short-selling ban is finally lifted, according to ruling Democratic Party lawmakers on August 16.

They said it is too early to lift the six-month ban when the coronavirus pandemic shows no signs of slowing, despite fears of overheating stock markets in which short selling could play a positive role.

In a recent poll by the Korean Investors, eight of the 13 ruling party members of the parliament’s national policy committee, excluding its head, have expressed their support for the extension of the short-selling ban. The remaining five members did not immediately respond to the survey, which they said, however, did not indicate opposition.

“Before lifting the short-selling ban, some prerequisites must be met,” said Kim Byung-wook of the Democratic Party. He is secretary of the National Assembly’s national policy committee, of which there are 24 members.

“Regulations need to be revised so that individual investors will not feel alienated from markets tilted toward foreign and institutional investors. We are delivering such opinions to the Financial Services Commission (FSC) who have the final say (over the rule),” he told the Korean Investors in a telephone interview.

The FSC will decide whether to extend or lift the ban before September 15. In response to the ruling party’s suggestion, an FSC official said that a decision will be made in a comprehensive and sensible way. The Democratic Party has the majority in the National Assembly.

In March, the financial watchdog implemented the ban on short selling between March 16 to September 15 to prevent a crash in the domestic stock market following market volatility, including an overwhelming outflow of foreign capital, in the wake of the coronavirus outbreak.

One of Kim’s proposed regulatory revisions is restricting short selling to large-cap stocks and applying the uptick rule to a broader range of investors, including brokerage firms. Currently, brokerages are exempted from the uptick rule that bans selling a borrowed share at a price below the current market value.

The Democratic Party is considering adopting a Hong Kong-style short-selling ban, in place since 1994, under which the practice is restricted to shares with market capitalization of over HK$3 billion and daily turnovers exceeding 60% of their market cap.

“Structurally, individual investors are in a disadvantageous position to access information and participate in short selling, compared to institutional and foreign investors,” said Park Yong-jin, another ruling party lawmaker on the national policy committee.

Last year, short-selling trade reached a combined 103.5 trillion won ($87 billion) on both the KOSPI and KOSDAQ stock markets, of which retail investors accounted for a meager 1.1%.

NO COMPLETE ABOLITION

But ruling party members stressed that a possible extension of the short-selling ban would not mean a complete abolition of the rule.

“There are some views that now short sellers could play a positive role, given fears of stock market overheating without reflecting the economic slowdown,” said Park.

Individual investors have been flocking to stock markets in droves, pouring net 6 trillion won into the domestic stock markets each month, on average, since the beginning of the year.

The amount of their deposits at securities firms surged to a record 51.1 trillion won ($43 billion) as of August 14, almost double the 27.4 trillion won hit early this year.

They also turned direct investors and picked their targets themselves, taking money out of equity funds managed by fund houses. Their taste has broadened into large-caps with solid financial conditions and high growth potential; beyond theme-based small-caps previously sought out for short-term gains.

Last month, President Moon Jae-in called for policy efforts to funnel abundant market liquidity into investment markets away from the overheated residential property market. In response, the finance ministry in July announced a cut in stock transaction tax rates for next year.

Meanwhile, the investment banking industry has expressed concern that lifting the ban could have a negative impact on rights offerings and initial public offerings in the pipeline.

By So-hyun Kim and Mee-hyun Cho

alpha@hankyung.com



(Photo: Getty Images Bank)

Yeonhee Kim edited this article

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