South Korea to fully resume short selling in March: FSC Chief

South Korea will allow short selling on all listed stocks in the country next month as planned, said the chief of the country’s financial regulator on Monday, reiterating the importance of lifting the blanket shorting-selling ban to encourage the return of foreign investors.

Kim Byoung-hwan, the chief of the Financial Services Commission (FSC), said in a press briefing that stock short selling should restart across the board on March 31 as long as no systematic problems are found.

“We previously allowed the partial resumption of short selling only on stocks with high foreign investor holdings,” said Kim. “But we have updated related systems and regulatory rules for over one year, meaning there is no reason to limit short selling.”

This will be the first time Korea will allow shorting on all listed stocks since March 2020 when financial authorities imposed a blanket short-selling ban to contain extreme market volatility in the face of the COVID-19 outbreak.

In May 2021, the country briefly resumed short selling but only on 350 stocks, some on the Kospi 200 and others on the Kosdaq 150 indices.

But when foreign banks were found to engage in illegal naked short selling, a practice that shorts stocks without making borrowing arrangements first, in 2023, the financial authorities completely banned short selling again in November of that year.

Kim’s confirmation on the full resumption of short selling comes less than a week after the chief of Korea’s top financial watchdog body, the Financial Supervisory Service (FSS), recommended it. 

The FSC has the authority to decide whether to allow full resumption short selling.

“Now is the time to consider foreign investors’ confidence (about our market) more,” said Kim.

ONLY DEVELOPED MARKET THAT FULLY BANS SHORT SELLING

Short selling is a legitimate stock trading practice involving borrowing shares of a stock, selling them in the open market and then repurchasing them with less money later to return to the lender.

Korea is the only developed market completely restricting short selling.

The ban is designed to prevent unfair, illegitimate trading but many argue that it neglects the benefits of short selling, which provides liquidity to the market and helps prevent overshooting.

Last June, global index provider MSCI Inc., which categorizes Korea as an emerging market, downgraded the country's short-selling accessibility in its annual review – a move widely seen as a hurdle for Korea’s inclusion in MSCI’s developed-markets index.

“Korea’s inclusion in MSCI’s developed-markets index is expected to ensure the inflow of a maximum 60 trillion won ($42 billion) worth of foreign net purchases,” said Lee Hyo-seob, senior research fellow at the Korea Capital Market Institute.

According to the Bank of Korea, foreign capital flight from the Korean stock and debt markets hit 2.6 trillion won in January.

RETAIL INVESTORS OPPOSE SHORT SELLING

Korean retail investors, however, often condemn institutional investors’ massive short selling for sinking share prices.

Korean politicians also often side with the retail investors’ move, pressuring financial regulators to impose a ban on short selling to win the hearts of voters.

Kim, however, expects market volatility that could be caused by the restart of short selling on stocks across the board late next month would be short-lived and limited. 

To ease public concern, the FSS will implement a new electronic monitoring platform to prevent illegal short-selling cases.

Its chief said last week the new system showed that it could detect 99% of large-scale naked short-selling cases.

Regarding concerns that short selling could target only a few stocks, the regulator will consider placing stocks extremely vulnerable to short selling on a special list of stocks, the trading of which would automatically be suspended the day after designation.

The country’s financial authorities will come up with detailed measures to protect heavily shorted stocks next month, Kim said.

Analysts, however, warn that the FSC could restrict short selling again due to public opposition. 

The FSC was said to have discussed banning short sales of only select stocks that fall 15-20% from the previous three-month average.

“Foreigners will return only when they are given clear guidelines on short selling along with the full resumption of short selling,” advised an official in the capital market.

Write to Hyun-joo Yang and Seok-Cheol Choi at hjyang@hankyung.com

Sookyung Seo edited this article.