S.Korea needs to allow short-selling for all listed stocks: FSS chief

Lee Bok-hyun, governor of South Korea’s top financial watchdog body, the Financial Supervisory Service (FSS), said on Thursday that there should be no restrictions on the stocks eligible for short-selling, ahead of the scheduled resumption of the practice at the end of next month.

Emerging from a forum on improving the stock market infrastructure held at the Korea Exchange, he stressed the need to allow the resumption of short-selling across the board.

“We understand there are concerns about fully reinstating short-selling practices, given that there are so-called zombie companies. But we also think about ways to reduce market volatility and gain the trust of foreign investors and institutions,” he told reporters.

In November 2023, the government imposed a blanket stock short-selling ban after some foreign banks were found to have executed a substantial amount of naked short sales, which is illegal in the country.

BLANKET SHORT-SELLING BAN

The Financial Services Commission (FSC), Korea’s top financial regulator, said last year that it would resume short-selling at the end of March 2025 after revising relevant rules to level the playing field between retail and institutional investors and strengthening fines and punishments for illicit trading practices.

The FSC said it would set up by March 2025 a centralized electronic monitoring platform to better detect naked short sales.

Short-selling, a legitimate stock trading practice involving borrowing shares and then selling them in the market, has been an unpopular trading strategy among Korean retail investors, who often blame such a practice for sinking share prices.

Naked short selling, a practice that shorts stocks without making borrowing arrangements first, is not allowed in Korea.

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.

FSC TO HAVE THE FINAL SAY

Before the complete ban on short-selling in November 2023, only 350 stocks, including those in the Kospi 200 and Kosdaq 150 indices, were allowed for short-selling.

The FSS chief, however, said that the FSC has the authority to make the final decision on the number of stocks to be allowed for short-selling.

Lee said he expects a new electronic monitoring platform to prevent illegal short-selling cases.

“Simulations of the FSS's new short-selling monitoring system showed that it could detect 99% of large-scale naked short-selling cases,” he said.

Lee said he plans to soon hold an overseas investor relations session on the resumption of short sales.

Write to Hyun-joo Yang at hjyang@hankyung.com

In-Soo Nam edited this article.