After the short-selling national surveillance system (NSDS) was installed and suspected cases of illegal short selling surged, the Korea Exchange decided to separate short-selling violations from general business rule violations and assess the level of discipline for each separately. Just six months after NSDS began operating, the exchange moved to refine related rules.
According to the financial investment industry on the 23rd, the Korea Exchange recently announced plans to enact and revise rules, saying it would refine the criteria related to applying aggravating factors for member discipline in the detailed enforcement rules of the Market Surveillance Regulations. It plans to gather feedback from related parties through the end of this month and implement the revised rules starting next month.
The core of the revision is to distinguish short-selling violations from general business rule violations and apply different disciplinary standards. Currently, the exchange can impose aggravated discipline on a member if, based on the Market Surveillance Committee's review and inspection results, the member has received three or more sanctions in the past two years, such as suspension, trading halt, penalty, warning, or caution.
Going forward, these disciplinary standards will be split into violations related to short-selling inspections and violations of general business rules, and the number of disciplinary cases for each will be counted separately to determine whether to aggravate.
In the meantime, the industry argued it was unfair that some institutions participating in NSDS became concentrated targets of inspection and faced a heavier disciplinary burden. Even if a case ends with a warning or caution, accumulation can make it subject to aggravated discipline. There were also concerns that the level of discipline could differ from institutions not participating in NSDS.
In response, the exchange explained the reason for the revision, saying, "As the frequency of inspections for illegal short selling increased due to NSDS operations, we sought to enhance the rationality of applying aggravating factors and the acceptance of sanctions." It also said it considered fairness in sanctions depending on NSDS participation.
At the end of March this year, the exchange resumed short-selling transactions and began operating NSDS. NSDS is a system that detects illegal short selling by electronically linking investment institutions' position management systems. Through NSDS, the exchange, after inspection, notifies the Financial Supervisory Service (FSS) of cases among detected suspicions where three types of violations are confirmed: naked short selling, quote transaction violations, and uptick rule violations.
Before NSDS was introduced, the exchange detected suspected illegal short selling through monitoring, but after its introduction, a system was established for the exchange to check position details every business day and extract suspected cases. As a result, the number of inspection targets increased significantly.
Some, however, argue that calculating disciplinary standards separately effectively eases the severity of penalties for illegal short selling. In response, the exchange said that if an institution obstructs related reviews and inspections or repeatedly violates cooperation obligations such as submitting materials, it will impose aggravated sanctions on that institution. An exchange official said, "This regulatory revision is the process of supplementing sanctions after the introduction of NSDS."