Korea builds system to speed up naked short-selling ban

South Korea’s top financial regulator is set to build a centralized digital system to strengthen the prevention of naked short-selling as the financial watchdog has detected an increase in the illegal practice by institutional investors over the past few years.  

The government measure comes after some global investment banks, such as The Hongkong and Shanghai Banking Corporation Ltd. (HSBC) and BNP Paribas, have been fined for their naked short sales of shares in Korean listed companies.  

Korea’s new digital process will have all institutional investors check whether there is an illegal short-selling before they place a short-sale order, said Financial Supervisory Service (FSS) Governor Lee Bokhyun on Thursday. After the orders are made, the process will check them again through a centralized digital system, Lee added.

The system will eradicate illegal short sales in Korea, seen as a major cause for domestic companies’ lower valuation than their global peers, the governor said.

Naked short sales, which happen when investors sell shares without first borrowing the stocks or determining whether the stocks can be borrowed, are illegal in Korea and some other countries.

AUTOMATIC PREVENTION, DETECTION

FSS plans to have 99 institutional investors, comprised of 21 foreign and 78 domestic institutions, implement a computerized system to block orders of naked short sales. If an order is not blocked, the centralized system of Korea Exchange (KRX) will automatically detect the illegal cases.

The computerized system will update the investors’ short-selling balance every day and will automatically disable naked short-selling orders.

The 99 investors’ short sales make up 92% of the short-selling of Korean listed stocks. Each institution holds more than 1 billion won in short sales or has short sales worth more than 0.01% of a company’s outstanding shares.

Institutional investors are mandated to verify that their short-selling trading system is adequate to place orders at brokerage firms.

KRX will set up a system to monitor institutional investors’ short sales and collect data on their short sales balances and transactions in real time. This will automatically check whether all short-selling orders have been made within the balance, FSS said.

If the balances on the KRX system and the investor’s report differ a few times, FSS will launch an investigation into the company.

FSS expects these measures will prevent naked short sales as a short-selling order can’t be placed if the value of the sale exceeds the value of the stocks owned or to be borrowed.

These measures will be automatically performed and speed up the detection process, compared with the financial watchdog manually checking data from each institution, the FSS added.

Write to Han-Gyeol Seon at always@hankyung.com


Jihyun Kim edited this article.