Authorities May Unveil 'Stock Market Stabilization Fund and Tax Benefits' as Market Calming Measures

Despite Full Ban on Short Selling, Market Anxiety Hard to Calm
In Worst Case, Measures to Shorten Trading Hours and Stock Registration Period Also Discussed

[Asia Economy Reporter Park Ji-hwan] As the market stabilization effect of the short-selling ban measure introduced by financial authorities to calm the sharp stock market decline proves ineffective, additional measures are under consideration. The market expects the most realistic options to be the establishment of a stock market stabilization fund and tax benefits for long-term stock funds.

According to the financial authorities on the 17th, the Financial Services Commission held an internal meeting on the same day to review measures for market stabilization as the domestic and international stock price crash continued despite the six-month short-selling ban implemented from the 16th. This is because the full ban on short selling was deemed insufficient to quell market anxiety, with the KOSPI and KOSDAQ plunging 3.19% and 3.72%, respectively, on the 16th. The KOSPI also showed a nearly 1.5% decline that morning.

Currently, the establishment of a stock market stabilization fund and tax benefits such as tax-exempt long-term stock funds are being discussed. The Financial Services Commission previously introduced the stock market stabilization fund card after banning short selling during the 2008 global financial crisis. The stock market stabilization fund is a market stabilization measure where securities-related institutions contribute funds to create a fund that helps stabilize the stock market.

At that time, four institutions?the Korea Securities Dealers Association, Korea Exchange, Korea Securities Depository, and Korea Asset Management Association?jointly raised 515 billion KRW. Funds were injected into the stock market from November of that year until March of the following year. Investments were made monthly in listed stocks and government bonds at an 80:20 ratio. As a market safety net, the fund was deployed when the decline was significant and withdrawn once the index reached a certain level.

A Financial Services Commission official explained, "We are preparing various options included in the contingency plan and will carefully decide when and which measures, including the stock market stabilization fund, to implement for maximum effectiveness."

The market emphasizes that the size of the stock market stabilization fund is crucial. If the scale is sufficient, it is expected to significantly aid supply and demand as a market stabilizer. The financial authorities are considering the participation of various institutions, including not only securities industry-related organizations but also financial holding companies. Although the fund size has not been finalized, it is expected to reach several trillion KRW when combining the fund contributions from the five major financial holding companies.

Hwang Se-woon, a research fellow at the Korea Capital Market Institute, stated, "The previously implemented 500 billion KRW scale of the stock market stabilization fund would only have symbolic significance. The fund size needs to be at least in the trillion KRW range to expect a meaningful effect in the market."

Tax benefit measures such as providing tax exemptions for investments in equity funds are also likely to be implemented. Proposals under review include income deductions on contributions to long-term equity funds, tax exemptions on dividend income, and tax credits on a portion of the purchase amount when companies buy back their own shares.

In the worst-case scenario, measures to shorten stock market trading hours and limit price fluctuation ranges are also being considered. If the stock market crash does not stop, the financial authorities' contingency plan reportedly includes shortening the stock market operating hours from 9 a.m. to 3:30 p.m. and reducing the price limit range from the current ±30%.

Meanwhile, controversy is growing over market makers (securities firms) who are exempt from the short-selling ban. The Korea Stock Investors Association (HanTuYeon), a group representing individual investors, issued a statement the day before, saying, "The six-month short-selling ban must include short selling by market makers." They criticized, "While the market maker system is somewhat necessary, in reality, frequent wash trades are used to manipulate prices or as a weapon to shake individual investors' sentiment." These market makers conducted short selling worth 486.7 billion KRW on the first day of the ban, the 16th.

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