South Korea to tighten penalties for illegal short selling
11 December 2020 South Korea
Image: SeanPavonePhoto/adobe.stock.com
South Korea's Financial Services Commission (FSC) is considering revisions to the Financial Investment Services and Capital Markets Act that would mean traders could face a year in prison and a large fine for naked short selling.
Currently, illegal short selling activities are punishable with minor fines, but the amendments would see the penalties ratched up to KRW 500 million (USD 456,896) or up to the amount of short orders, as well as a minimum one year of imprisonment or a fine of more than three times and up to five times the avoided loss amount.
The strengthened penalties will help prevent intentional attempts at illegal short sale while preventing investor errors and mistakes, says the FSC, while also improving accountability of domestic stock markets.
As part of the enhanced oversight, short sellers must keep their securities lending agreements for five years and promptly submit them to the financial authorities when requested.
This, the regulator says, will help improve transparency and help financial authorities to more readily identify illegal short sale activities.
Short sellers found guilty of illegal activity will also be prohibited from participating in equity financing of companies whose stocks they have shorted once the companies鈥� plans for equity financing have been disclosed.
Once the revision to the act is approved at an upcoming cabinet meeting, it will go into effect three months after promulgation.
In the meantime, the FSC will work on related amendments to lower regulations to ensure a seamless implementation.
In close coordination with the Korea Exchange, the FSC says it will also work on the development of a real-time illegal short sale detection mechanism, require mandatory inspection for illegal short sales every month and increase the number of personnel responsible for monitoring.
Meanwhile, South Korea is among the last markets to maintain a short selling ban initially brought in to protect domestic equity markets during the initial outbreak of COVID-19.
The ban has been extended twice and is not due to expire in February 2021.
Currently, illegal short selling activities are punishable with minor fines, but the amendments would see the penalties ratched up to KRW 500 million (USD 456,896) or up to the amount of short orders, as well as a minimum one year of imprisonment or a fine of more than three times and up to five times the avoided loss amount.
The strengthened penalties will help prevent intentional attempts at illegal short sale while preventing investor errors and mistakes, says the FSC, while also improving accountability of domestic stock markets.
As part of the enhanced oversight, short sellers must keep their securities lending agreements for five years and promptly submit them to the financial authorities when requested.
This, the regulator says, will help improve transparency and help financial authorities to more readily identify illegal short sale activities.
Short sellers found guilty of illegal activity will also be prohibited from participating in equity financing of companies whose stocks they have shorted once the companies鈥� plans for equity financing have been disclosed.
Once the revision to the act is approved at an upcoming cabinet meeting, it will go into effect three months after promulgation.
In the meantime, the FSC will work on related amendments to lower regulations to ensure a seamless implementation.
In close coordination with the Korea Exchange, the FSC says it will also work on the development of a real-time illegal short sale detection mechanism, require mandatory inspection for illegal short sales every month and increase the number of personnel responsible for monitoring.
Meanwhile, South Korea is among the last markets to maintain a short selling ban initially brought in to protect domestic equity markets during the initial outbreak of COVID-19.
The ban has been extended twice and is not due to expire in February 2021.
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