"Transparency Improved with Loan Agreement Information Storage System... Limits in Preventing Intentional and Accidental Naked Short Selling"

[Asia Economy Reporter Lee Seon-ae] The Korea Securities Depository (KSD) announced on the morning of the 15th at its Seoul office in Yeongdeungpo-gu, Seoul, during a briefing on the Securities Lending Agreement Confirmation System, that it will launch the "Securities Lending Agreement Confirmation System," which stores securities lending agreement information, starting March 8.

Institutions and foreigners engage in securities lending transactions to borrow stocks for purposes such as short selling. However, lending agreements between borrowers and lenders have been conducted manually via phone calls and emails. Individual investors have pointed out that they cannot know if short selling occurs without actually borrowing stocks.

The Securities Lending Agreement Confirmation System digitizes the confirmation process of lending agreements between borrowers and lenders. When participants enter the details of the securities lending agreement, the contract date and time are automatically generated and stored, preventing any possibility of post-facto manipulation.

For transactions previously conducted manually via phone or email, the system also provides a service to store the original securities lending agreements. Additionally, these records will be managed in an integrated manner to allow easy access and inquiry.

This system was established following the enforcement of the amended Capital Markets Act on April 6. The revised Capital Markets Act mandates that borrowers themselves or intermediary institutions store and report securities lending information for short selling purposes. Lee Jin-il, head of the Securities Lending Department at KSD, explained, "As an intermediary institution for securities lending, we prepared this measure to support institutional improvements."

Regarding the effects, Bae Hyuk-chan, head of the Securities Settlement Division at KSD, said, "We expect various benefits such as resolving distrust and enhancing convenience for securities lending customers." However, since this system is limited to securities lending transactions, it has limitations in preventing naked short selling that may occur due to intentional or accidental errors when borrowers actually place short selling orders. Lee said, "Securities lending transactions are conducted by borrowers mainly through intermediary institutions, while short selling transactions occur on the exchange," adding, "Various institutions such as securities firms and custodians are involved in short selling transactions and are making efforts to improve the short selling system in their respective areas."

When asked whether the system can guarantee the reliability of the contract contents between the parties involved in the securities lending transaction, he replied, "We guarantee the reliability of storage and that the information cannot be altered after entry, but the borrower must guarantee the reliability of the content itself," adding, "We plan to clarify detailed guidelines for content entry later."

The system to be launched next month will initially target domestic institutional investors. For foreigners, considering variables such as time differences and fund settlement authentication methods, additional system development is underway. Lee explained, "We are building related infrastructure using the international interbank communication network (SWIFT), currently used for funds, and are conducting development and testing to open the service within this year."

KSD stated that it will continue efforts to improve operations and support government and National Assembly policies for short selling system improvements and the advancement of the securities lending market.

Lee Myung-ho, president of KSD, said, "Through the establishment of the Securities Lending Agreement Confirmation System, we expect not only to enhance customer convenience but also to resolve distrust in securities lending and short selling transactions by improving transaction transparency, thereby supporting financial authorities' policies to improve the short selling system."

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