Government Contingency Plan Phase One...Easing of Short Selling Ban Requirements

Reviewing Additional Measures... Doubts on Effectiveness
BOK "Will Take Measures to Stabilize Foreign Exchange Market"

[Asia Economy Reporters Ji-hwan Park, Bo-ryeong Geum, Hyun-jung Kim] As the new coronavirus infection (COVID-19) causes the stock market to plummet daily and financial volatility expands, the government has decided to implement short selling measures from the 11th, expanding the designated targets for short selling and extending the prohibition period to stabilize the market. The government stated that it will promptly introduce additional market stabilization measures if necessary.

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, announced these measures at a meeting of related ministers (Green Room meeting) held at the Government Seoul Office on the 10th.

The main points of this measure are to relax the criteria for designating overheated short selling stocks for three months and to extend the trading prohibition period from one day to two days or more. The trading restrictions will be applied from the 11th according to the revised criteria. This measure is interpreted as the first step in a phased contingency plan in response to the stock price crash caused by the spread of COVID-19.

Short selling refers to an investment method where stocks expected to decline in price are borrowed and sold without owning them, and then repurchased at a lower price to return the stocks and earn a profit. Temporary short selling bans were implemented twice before during the 2008 global financial crisis and the 2011 European debt crisis. The COVID-19 situation is judged to be a shock comparable to those two past crises.

Kim Yong-beom, First Vice Minister of Economy and Finance, also held a macroeconomic and financial meeting on the morning of the same day and said, "We will immediately implement the strengthened designation system for overheated short selling stocks, and if necessary, we will promptly and decisively implement additional market stabilization measures while monitoring future market conditions."

Currently, the designation system for overheated short selling stocks applies when the short selling transaction amount growth rate exceeds six times (five times for KOSDAQ) and the stock price decline rate is 10% or more. When designated as an overheated stock, short selling is prohibited for one day. The Financial Services Commission plans to expand the criteria for designating overheated short selling stocks, such as transaction amount growth rate and stock price decline rate, according to this decision. It is also reported that the prohibition period after designation as an overheated short selling stock will be gradually extended from the current one day to two days or more.

On the morning of the same day, Lee Ju-yeol, Governor of the Bank of Korea, convened an emergency executive meeting and emphasized, "As financial stability risks are increasing, we will actively utilize all possible policy tools to promote financial stability," and "We will closely monitor exchange rates and foreign currency funding conditions and take market stabilization measures if necessary."

The KOSPI, which had fallen by 4.19% the previous day, showed signs of stabilization that morning. As of 10:40 a.m., the KOSPI recorded 1963.34, up 0.44% (8.57 points) from the previous session. The KOSPI opened at 1942.85, down 11.92 points (0.61%) from the previous trading day, and during the session dropped to as low as 1934.72, but repeated fluctuations within the box range supported by institutional buying. Previously, the KOSPI market capitalization decreased from 1,404.6844 trillion won on the 5th to 1,316.4277 trillion won on the 9th.

This content was produced with the assistance of AI translation services.