Yahoo Finance Korea Extends Short Ban, Threatens Life in Jail for Illegal Bets
(Bloomberg) -- South Korea is extending a ban on stock short selling through March 30 next year and planning harsher penalties for illegal trades.
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The government first outlawed short sales in November to root out naked shorting — the practice of selling shares without borrowing them first — which is illegal in the country. The restrictions were due to expire at the end of this month, but authorities are now extending the deadline until a system to detect improper trades is ready.
“If short selling is resumed without a monitoring system in place, there is the risk that massive illegal activities may be repeated,” said Kim Soyoung, vice chair at the Financial Services Commission. “It will be allowed from March 31 after the platform is ready,” he said, adding that it’s difficult to say whether the rule change will be applied to all stocks.
In a separate statement on Thursday, the government said it will increase financial penalties and jail terms up to life imprisonment for illicit activities. The same terms on repayment and margin requirements will be applied for retail and institutional investors to create a level playing field, it added.
While politically influential retail investors have welcomed the short-selling ban, the move has been controversial within the financial community as the strategy is widely used by money managers in other markets. MSCI Inc. said in its annual market accessibility review that the country’s short-selling accessibility is “deteriorating.”
News that the ban will eventually be lifted is “better late than never,” said Jung In Yun, chief executive officer at Fibonacci Asset Management Global Ptd. “I’m optimistic that the resumption of short selling would increase liquidity in South Korea and lower volatility.”
Nonetheless, the moves showed that “regulations in South Korea, like China, could change overnight and tarnished the image of the nation,” he added.
South Korea’s benchmark Kospi Index closed 1% higher on Thursday, trimming gains of as much as 1.8%.
Authorities are planning penalties of as much as six times the profit from illegal short selling, up from five times now, the statement said. Those whose profit from such trading misdeeds of at least 5 billion won ($3.6 million) can face up to life in prison, a change from a maximum 30-year jail term previously.
The government will also adopt a repayment period of 90 days for both retail and institutional investors, which can be extended up to twelve months. Those who engage in illegal short selling will be restricted from serving as executives at listed companies and financial firms in Korea. Stricter rules will also be applied in disclosing short positions. The changes would need parliamentary approval.
Shortly after short sales were banned, South Korea launched an investigation into global banks to scrutinize their past transactions. Investigators have so far found $156 million worth of illegal short trades by nine global investment banks, most of which were procedural rule violations.
--With assistance from Shinhye Kang.
(Updates with resumption date, money manager comment)
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