South Korea is extending a ban on short-selling goods until March 30 next year and is planning tougher penalties for illegal trading.
“If short selling is resumed without a monitoring system in place, there is a risk that large-scale illegal activities may recur,” said Kim Soyoung, vice chairman of the Financial Services Commission. “It will be allowed from March 31 after the platform is ready,” he said, adding that it is difficult to say whether the change in the law will be applied to all stocks.
The government closed the exchange in November to end bare asset trading—the practice of selling stocks without first borrowing them—which is illegal in the country. The restrictions were supposed to expire at the end of this month, but the authorities recently revealed that the deadline will be extended until a system to detect illegal trade is ready.
In a statement earlier Thursday, the government said it would increase financial penalties and prison terms up to life imprisonment for illegal activities. The same conditions regarding payment and margin requirements will be applied to retail and institutional investors to create a level playing field, it said.
Although retail investors have welcomed the ban on short selling, the move has been controversial within the financial community as the strategy is widely used by money managers in other markets. MSCI Inc. it said in its annual review of market accessibility that the country’s access to short-term sales is “deteriorating.”
“Better late than never,” said Jung In Yun, CEO of Fibonacci Asset Management Global Ptd. “I am optimistic that the resumption of short selling will increase the currency rate in South Korea and reduce volatility.”
Still, the moves showed that “South Korea’s laws, like China’s, can change overnight and undermine the nation’s image,” he added.
South Korea’s benchmark Kospi Index closed 1% higher on Thursday, paring gains of as much as 1.8%.
Authorities are planning fines of up to six times the profit from illegal sales, up from five times now, the statement said. Those whose profits from those bad trades are at least 5 billion ($3.6 million) could face up to life in prison, a change from the previous 30-year prison sentence.
The government will also accept a 90-day payment period for both retail and institutional investors, which can be extended up to twelve months. Those who engage in illegal short selling will be banned from working as managers in listed companies and financial institutions in Korea. Strict rules will also be applied to the disclosure of short positions. The changes will require parliamentary approval.
Shortly after the trade ban, South Korea launched an investigation into international banks to scrutinize its past short-selling transactions. Investigators have so far found illegal short trades worth $156 million through nine investment banks around the world, most of which were in violation of procedural rules.
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