When short selling resumes on 31st next month, institutional investors must establish an automated system to prevent naked short selling. Violating this will result in fines of up to 100 million won and sanctions against institutions and employees. Additionally, the conditions for short selling transactions will be standardized to ensure individual investors are not at a disadvantage compared to institutions and corporations. Institutions and foreigners must also repay borrowed shares for short selling within 90 days.
The Financial Services Commission noted on the 18th that the amended Capital Markets Act related to improving the short selling system has passed the Cabinet meeting and will be implemented starting March 31.
According to the amendment, the repayment period for lending transactions related to short selling is within 90 days. This is determined by the lender and the borrower, but even including extensions, the total period is limited to within 12 months. Violating this will result in fines of 100 million won for corporations and 50 million won for individuals.
Measures to prevent institutional naked short selling will also be mandatory. Naked short selling is the act of "selling first, borrowing later." It is the opposite of lending short selling, which is "borrowing first, selling later." Most countries, including South Korea, prohibit naked short selling due to concerns about market stability.
All corporations must establish internal control standards related to preventing naked short selling. These internal control standards must include employees' roles and responsibilities, management of stock balances by item, and details of short selling, including record-keeping for five years.
The target for installing the automated system to block naked short selling includes corporations with stock balances of 0.01% (excluding amounts under 100 million won) or more than 1 billion won, as well as institutional investors such as market makers and liquidity providers. These institutions must submit information about item balances to the Korea Exchange's Central Check System (NSDS) within two business days.
Securities firms commissioned to execute short selling orders for corporations must verify annually whether they have internal control standards and automated systems, reporting to the Financial Supervisory Service. Even if there is no naked short selling, corporations and securities firms that violate preventive measures will be fined up to 100 million won. Sanctions against institutions and employees will also be possible.
Additionally, financial authorities specified the acquisition restriction period for convertible bonds (CB) and bonds with warrants (BW) for short selling traders. If short selling occurs from the day after the initial issuance announcement to the day the pre-issuance conversion price and exercise price are announced, the acquisition of CB and BW is prohibited. For short selling orders conducted at the alternative trading system (ATS) launching in March, the same short selling marking obligations will apply as at exchanges.
Financial authorities said, "We will ensure thorough preparations for the resumption of short selling by closely following up on the measures to improve the short selling system."