Covered short sale trades of all securities listed on the Korea Exchange (“KRX”) namely KOSPI, KOSDAQ, and KONEX markets are prohibited commencing November 6, 2023 and ending June 30, 2024 unless otherwise extended.
I. COMPLETE BAN ON SHORT SELLING
On November 5, 2023, the Financial Services Commission (the “FSC”) announced a temporary complete ban on covered short selling, amid growing market instability. Naked short selling is already prohibited under the existing rules. This temporary ban will have the effect of prohibiting covered short selling of all types of securities listed on the Korea Exchange (“KRX”) (i.e., securities, depository receipt, exchange traded fund, exchange traded note, equity-linked warrant, subscription warrant, subscription right certificate, beneficiary certificate listed on the KOSPI, KOSDAQ and KONEX markets) from November 6, 2023 to end of June, 2024 (the “Relevant Period”). The FSC is authorized and is utilizing its powers under the Financial Investment Services and Capital Markets Act and its Enforcement Decree. However, certain covered short selling by market makers, liquidity providers etc. are permitted.
During the Relevant Period, the FSC plans to develop and implement systemic improvements, including measures to address the “uneven playing field” of short selling conditions and measures to prevent naked short selling. Furthermore, the FSC plans to focus on the detection and penalization of naked short selling by non-local and institutional investors supported by the short selling task force launched on November 6, 2023. The FSC announced that it will apply a zero-tolerance approach, including strict sanctions and aggressive criminal prosecution of any further illegal naked short selling.
II. INVESTIGATION OF OFFSHORE SHORT SELLERS
It is understood that one of the factors behind the ban is large-scale illegal naked short selling by offshore investment banks, which were recently detected and are under investigation. The FSC plans to take the following proactive measures.
Investigation of offshore short sellers to identify and penalize naked short selling including:
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Launch short sale task force and investigations unit on November 6, 2023.
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Take a zero-tolerance approach in case of detection of illegal naked short selling.
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Actively discuss with the National Assembly on increasing penalties and diversifying sanctions.
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