Korea tightens rules to prevent naked short selling ahead of March 31 resumption

Securities firms failing to implement measures to stop illegal practice will face fines

By Jun Ji-hye

Corporations intending to short sell listed stocks are required to establish internal control standards to prevent naked short selling, according to the Financial Services Commission (FSC) Tuesday. Naked short selling involves selling shares before securing a borrow, which is prohibited under the Capital Markets Act in Korea.

While announcing regulatory improvements to prevent naked short selling ahead of short selling resumption next month, the country's financial regulator emphasized stricter oversight.

It said corporations meeting the disclosure threshold — holding short positions of at least 0.01 percent of outstanding shares or 1 billion won — along with market makers and liquidity providers, must manage short positions on a per share basis and implement an electronic system to prevent naked short selling.

Additionally, these institutions are required to submit daily stock-by-stock short position data to the Korea Exchange’s central monitoring system within two business days.

Violations would result in penalties and fines of up to 100 million won ($69,000).

These new rules are included in the revised enforcement decree of the Capital Markets Act, which was approved at a Cabinet meeting earlier in the day and will take effect on March 31 when short selling is scheduled to fully resume.

Korea imposed a ban on short selling in November 2023 after uncovering a series of naked short selling violations involving several global investment banks. The ban was originally set to expire at the end of June 2024 but was pushed back to March 31 this year.

The revised rules also ensure that short selling conditions are standardized so that individual investors are not disadvantaged compared to institutional and corporate investors.

Even if naked short selling does not occur, corporations and securities firms that fail to comply with preventive measures will be subject to fines of up to 100 million won. For securities firms and other financial investment companies, sanctions may also be imposed on the institution and its employees.

Short selling orders executed on the alternative trading system (ATS), set to launch in March, will be subject to the same short-sale marking requirements as those on the stock exchange.

Korea’s first ATS, Nextrade, is scheduled to launch on March 4.

“We will ensure thorough implementation of the short selling reform measures as we prepare for the resumption of short selling,” an FSC official said.