Considering Improvements to the Short Selling System...Seeking Solutions from Hong Kong and Japan

Short Selling Ban Scheduled for the 15th of Next Month... 6-Month Extension Likely
Financial Services Commission Chairman Eun Seong-su States at Plenary Meeting "Discussing Various Measures"
Possibility of Compromise Between Market Cap Limits and Two Countries with Easy Access for Individuals

[Asia Economy Reporter Park Jihwan] As the temporary ban on short selling, which ends on the 15th of next month, is likely to be extended, financial authorities are drawing attention to whether they will introduce Hong Kong and Japanese-style short selling systems. The Hong Kong model allows short selling only for listed companies with a market capitalization above a certain threshold, while the Japanese model facilitates easier access to short selling for individual investors, raising the possibility of a compromise plan combining both approaches.

According to financial authorities and the financial investment industry on the 25th, the Financial Services Commission is discussing options such as 'extension of the period,' 'gradual lifting,' and 'system improvement' in relation to the end of the short selling ban next month. Financial Services Commission Chairman Eun Sung-soo stated at the plenary session of the National Assembly Budget and Accounts Committee held the day before, "We are considering various options, including partial extension." In response to a question from Park Yong-jin, a member of the Democratic Party of Korea, asking whether the extension would apply only to KOSPI or large-cap stocks, Chairman Eun explained, "We are discussing methods such as immediate extension and gradual resumption after extension," adding, "We may mix these approaches and are considering various options."

Inside and outside the industry, the extension of the short selling ban, currently scheduled until the 15th of next month, by an additional six months is seen as the most likely option. This is due to the rapid spread of COVID-19 and the continued significant risk factors in the stock market, such as the KOSPI dropping more than 2% in a single day last week. The industry believes that financial authorities are focusing their policy efforts on the direction of system improvements following the extension of the short selling ban.

Financial authorities are benchmarking the Hong Kong and Japanese models regarding future short selling system improvements. Since 1994, Hong Kong has allowed short selling only for stocks with a market capitalization of 3 billion Hong Kong dollars (approximately 460 billion KRW) or more and a 12-month market capitalization turnover rate of 60% or higher. The Hong Kong-style short selling system designates short selling-eligible stocks based on size criteria such as market capitalization. The purpose is to protect small and medium-sized enterprises, which are more vulnerable to large price fluctuations or potential price manipulation due to short selling. By restricting short selling only on small and mid-cap stocks, which have a higher proportion of individual investors with limited capital, it reduces potential damage and has a relatively smaller ripple effect on the market. However, a downside is that because short selling eligibility is determined on a continuous basis by stock, market price efficiency may decline depending on whether restrictions apply to specific stocks. It also does not improve individual investors' access to short selling.

To dispel controversies about a "tilted playing field," the Japanese-style short selling system, which increases individual investors' access to short selling, is being discussed. Last year, individual investors accounted for only 1.1% of the 103.4936 trillion KRW short selling transaction volume in the domestic stock market. Foreigners (62.8%) and institutions (36.1%) accounted for a total of 98.9%. In contrast, in Japan, individual investors make up about 25% of all short selling.

The significant difference between Japan and Korea is due to the difficulty individual investors face in borrowing stocks in the domestic market. Short selling is an investment method where investors borrow stocks they do not own and sell them at the current price. In Korea, individuals have much lower creditworthiness compared to foreigners or institutional investors, making stock lending transactions difficult. Although Japanese individual investors also have relatively low creditworthiness, a key difference is that a separate public institution provides stock lending services to individual investors. Instead of securities firms lending stocks they have secured as resources, a financial institution specializing in supplying stock lending resources centrally provides stock lending services.

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