Individual Short Selling Loaned Stocks to Increase 20-Fold

[Asia Economy Reporter Koh Hyung-kwang] A blueprint has been unveiled to increase retail investors' accessibility to short selling. A 'K-Loan System' will be established to allow individuals to easily borrow stocks for short selling, expanding the lending stock volume to 1.4 trillion KRW, about 20 times the current size. With the resumption of short selling scheduled for March next year, penalties for illegal short selling will also be significantly strengthened.

On the 2nd, Korea Securities Finance held a forum on 'Improving Retail Loan Accessibility' at the Bankers' Hall in Myeong-dong, Seoul, proposing the introduction of the K-Loan System, which links the systems of securities finance and securities firms to enable real-time loan transactions. The K-Loan System is a measure to expand the loan market, considered a prerequisite for activating retail short selling.

In the short selling market, retail investors face limited accessibility and insufficient loan resources. While the securities lending market used by foreigners and institutions for short selling was about 67 trillion KRW last year, the loan market used by individuals for short selling was only 23 billion KRW. This is because individuals have limited channels to borrow stocks in the short selling market. Individuals can short sell by borrowing stocks from securities finance through securities firms, but only six securities firms?NH Investment & Securities, Shinhan Financial Investment, Kiwoom Securities, Daishin Securities, SK Securities, and Yuanta Securities?handle loan services.

Korea Securities Finance presented a three-step plan to activate loans by increasing the number of securities firms handling loan services, expanding loan resources, and building a real-time integrated trading system to improve the efficiency of loan resource utilization. First, to increase the number of securities firms handling loans, Korea Securities Finance will form a dedicated team to actively support the construction of loan systems at these firms. It will also actively support securities firms in establishing systems that allow the use of credit loan collateral stocks for loans with investor consent, thereby expanding loan resources.

Furthermore, Korea Securities Finance plans to build a real-time integrated trading system, called the 'Korean-style K-Loan System,' enabling securities firms handling loans to immediately check the available loan quantity by stock, thereby enhancing the efficiency of loan resource utilization. Currently, Korea Securities Finance allocates loan quantities by stock in advance to each securities firm, resulting in some firms having surplus while others face shortages, leaving some loan resources unused.

With the implementation of this three-step activation plan, the loan volume is expected to increase twentyfold. As of the end of February, the available lending stock volume was 71.5 billion KRW. If ten securities firms handle credit loans and borrowing sources expand, this will increase to 900 billion KRW, and with the establishment of the real-time integrated trading system, it is expected to rise to 1.4 trillion KRW.

However, strengthening investor protection in line with the expansion of retail short selling investment is identified as a challenge. Since short selling carries greater risks than general stock trading, enhanced investor protection measures are necessary. A Korea Securities Finance official explained, "Short selling can only profit up to the principal when stock prices fall, but losses can exceed the principal if prices rise, making it riskier than general stock trading," adding, "Investor protection measures such as mandatory pre-education, setting borrowing limits tailored to investor capability and type, and establishing collateral ratio standards are needed."

Penalties for illegal short selling will also be strengthened. The National Assembly has mandated imprisonment of at least one year and fines amounting to three to five times the illicit gains for illegal short selling, which had been criticized for lenient punishments. On the previous day, the National Assembly merged the Capital Markets Act amendment proposed by Kim Byung-wook of the Democratic Party with bills introduced by Kim Tae-heum of the People Power Party and Lee Tae-gyu of the People’s Party, passing them through the Legislation and Judiciary Committee’s subcommittee. The bill is scheduled to be processed in the plenary session on the 9th. The regulations passed in the plenary session will apply from the resumption of short selling on March 15 next year, at the earliest.

Naked short selling, which involves selling stocks without borrowing them first, has been defined as illegal under the Capital Markets Act in Korea since the 2008 financial crisis. However, the maximum penalty has been limited to a fine of 10 million KRW, leading to calls for harsher punishments.

The main points of the amendment include ▲establishing a legal basis for restricting borrowed short selling ▲prohibiting those who engage in borrowed short selling from participating in paid-in capital increases ▲introducing obligations to retain and report securities lending transaction information ▲criminal penalties for illegal short selling. The law sets the legal grounds to restrict borrowed short selling and prohibits those who engage in it from participating in paid-in capital increases. The penalty level has also been raised, allowing fines up to the amount of the short selling order for illegal short selling. Additionally, if a person who engaged in borrowed short selling violates the prohibition on participating in paid-in capital increases, a fine will be imposed, and illegal short selling will be punishable by imprisonment of at least one year or fines amounting to three to five times the illicit gains.

The fact that the naked short selling detection system has become more thorough than before is positive for the market. Hwang Se-woon, a research fellow at the Korea Capital Market Institute, said, "The simultaneous promotion of stronger penalties for illegal short selling and measures to increase retail short selling accessibility is the right direction," adding, "Especially, imposing fines based on transaction amounts signals a strong will to crack down on illegal short selling, which will reduce the possibility of short selling abuse."

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