※ This content aired on Yonhap News Economy TV’s ‘Economy ON’ program at 4pm on Monday, November 20th. (Appearance: Jeong Ji-seo, Yonhap Infomax Reporter, Host: Lee Min-jae)
These days, the stock market is still hot with talk of short selling. The government, which surprisingly announced a total ban on short selling, even announced a plan to improve the short selling system ahead of last weekend. Today, we will find out more details with reporter Jeong Ji-seo of the Investment and Finance Department. Mr. Jeonggi, please explain in simple terms what the government announced.
Yes, it was on the 16th. The government announced a plan to improve the short selling system.
This is only 10 days after the announcement that short selling would be temporarily banned until June of next year. There are two main things the government emphasized on this day: it will correct the so-called ’tilted playing field’, and if the system is not improved enough, it will extend the ban on short selling. It goes like this.
The expression “tilted playground” is actually an old controversy that has been going on for a long time. Does the idea of making it flat ultimately mean creating conditions that are more advantageous to individuals with short-selling trading restrictions than institutions?
In fact, the core of the short selling market is the different repayment institutions of individuals and institutions, but this part has been unified. From now on, the repayment period for loan transactions for institutions requiring early repayment will be 90 days, the same as for individual loan services, and can be extended.
It may seem a bit complicated, but there are two main types of short selling. There is unleveraged short selling, which involves selling stocks that do not exist in advance, and leveraged short selling, which involves borrowing and selling stocks held by institutions such as the Korea Securities Depository or securities firms.
Therefore, short selling is always accompanied by lending or borrowing transactions. Lending refers to a transaction in which stocks are borrowed through a securities company, while lending refers to a transaction in which stock borrowers and lenders exchange stocks over the counter under a separate contract. In this process, individuals usually borrow stocks through securities firms, and institutions borrow stocks through loans. However, the period for repaying these stocks was different. Stock lending is also a type of lending business, so for individuals, the period was 90 days, and for institutions, there were no restrictions. That is why the dissatisfaction of individual investors has been increasing.
In the future, lending brokers such as the Korea Depository will be required to check the loan contract repayment period of traders, and a fine of 100 million won will be imposed on lending traders who violate the repayment period.
The most critical repayment institutions for individuals and institutions have become the same, and what has changed in the collateral ratio? Has this also become flat?
Yes, the loan-to-collateralization ratio for individuals, which is currently 120%, has been lowered to over 105%, the same as for loans to institutions and foreigners. First, cash is set at 105%, the same as loans, and for stocks, the collateral ratio is set considering discount valuation, but KOSPI 200 stocks are kept at 120%. Considering that the stock collateral ratio must be maintained at 135% in lending transactions, lending transactions set at 120% are more advantageous. Instead, if a reverse transaction occurs due to a reduction in the collateral ratio, the likelihood of a confirmed loss increases. So the government decided to further strengthen investor guidance.
Since the numerical part is becoming the same as that of foreigners and institutions, it feels like the short selling playing field is truly leveling out. Are there any other policy changes?
A system will be established to prevent non-leveraged short selling, which was considered a common practice. As mentioned earlier, unleveraged short selling is an illegal activity strictly prohibited under the Capital Markets Act, and recently, circumstances of unleveraged short selling by global IBs were discovered and caused an uproar. Financial authorities are looking for the background to unborrowed short selling, which is considered a common practice, through insufficient short selling balance management.
Currently, there are about 100 domestic and foreign institutional investors engaged in short selling. In the future, they have decided to establish an internal system to electronically manage the balance available for sale, thereby preventing unleveraged short selling in three steps.
In addition, financial authorities have also begun a review of whether it is possible to establish a system to block non-leveraged short selling that may occur externally in real time. In fact, this issue was discussed once in the National Assembly in 2020. At the time, it was concluded that it was realistically difficult. However, as the need to block the source of non-borrowed short selling is emerging, we plan to first specify related measures by the first half of next year.
Are you saying that sanctions against illegal short selling will also be strengthened?
Yes, it was a justification that the government emphasized when announcing a total ban on short selling. This is not a populist policy announced ahead of next year’s general election. We emphasized that this is a timely market measure to protect individual investors and create fair prices in the market.
The reason behind this was illegal short selling. Currently, the Financial Supervisory Service’s short selling special investigation team is investigating about 10 global IBs. They are also looking into whether the securities firms that entrusted the short selling orders condoned or colluded in unleveraged short selling and whether there was unfair trading related to these transactions.
Financial authorities are considering various sanctions against these short-selling violators, including restrictions on stock trading for up to 10 years. The bill proposed by Representative Yoon Chang-hyun last May also includes provisions to strengthen the punishment for illegal short selling, and the financial authorities are determined to further strengthen the level of punishment through discussion in the National Assembly.
Well, first of all, the government came up with a major solution to resolve the tilted playing field, and that too in just 10 days. What is the reaction?
The atmosphere seems to welcome improvements in repayment institutions and collateral ratios. However, as the stock price of certain stocks such as rechargeable batteries and biotechnology has suffered a large decline due to illegal short selling, there is a strong sense of caution that the effects of system improvement still need to be observed further.
There seems to be more concern in the market about measures related to short selling. Last time, you said that because Korea has particularly strong regulations related to short selling, there is a strong negative view from overseas. Has there been any evaluation of this measure?
Yes, the day after the complete ban on short selling was announced. JP Morgan is said to have pointed out to institutional investors through an informal route that Korea’s move was a regulatory decision without prior notice. JP Morgan also predicted the possibility of a bubble in the domestic market, diagnosing that regulatory decisions without public consultation or even a grace period could have a long-term impact on trust in the system in the Korean market. In addition, as short selling is a key decision-making factor in determining MSCI market accessibility, we predicted that there is a small possibility that the country will be included in the developed index observation list in June next year.
Recently, State Street Bank, a global custodian bank, announced that it would discontinue domestic stock lending services starting next year, which had a significant impact. State Street Bank is one of the largest custodian banks in the world. The market interprets this as foreign banks giving up on the domestic market. This is because the financial authorities’ investigation into illegal short selling was interpreted as a regulatory risk. Regarding this, some are even predicting that the supply and demand of foreigners in the domestic market is shrinking.
From JP Morgan to global custodian banks, short selling regulations are evaluated harshly in the global market. But isn’t the government’s policy that it can actually extend the total ban on short selling?
Yes, the president’s remarks were a big deal. On the 14th, President Yoon announced at a Cabinet meeting that he would ban short selling until a fundamental improvement plan is developed to prevent further damage.
The President was also aware of market concerns that inclusion in the MSCI developed index next year may become difficult. Rather, more emphasis was placed on protecting individual investors. If the illegal short selling problem is left unattended, individual investors’ losses will increase and trust in the securities market will decline. President Yoon’s comment was that more investors may defect.
Afterwards, Financial Services Commission Vice Chairman Kim So-young also made a statement to the same effect. There is talk of foreign investors leaving the capital market, but the overhaul of the short selling system is a measure to strengthen market trust. It may be extended if future market trends and system improvements are not sufficient. It was literally said that they would judge it at that time.
Now, two weeks have passed since the announcement of a complete ban on short selling. How was the domestic stock market?
Yes, as it was pointed out that the ban on short selling was low on the first day, looking at the trends of the past two weeks, KOSPI, which exceeded the 2,500 level on the first day after the ban on short selling was announced, ultimately failed to increase further on the first day. From the 6th to the 17th, individuals sold close to 3 trillion won in stocks, and foreigners made a similar amount of net purchases.
It was fun to see stocks change hands, but in the case of individuals, I bought a large number of rechargeable battery-related stocks that were mentioned as stocks that could be harmed by short selling. POSCO Holdings, POSCO Future M, EcoPromerty, and Samsung SDI were among the top stocks purchased by individuals. On the other hand, these stocks were the top net sellers by foreigners. During this period, foreigners purchased semiconductor stocks such as Samsung Electronics and SK Hynix. Contrary to the Donghak ants switching from semiconductors to secondary batteries, the foreigners’ investment is turning to semiconductors.
In fact, the market seems to have already paid more attention to changes in the macro environment, such as the performance of domestic companies or interest rates, rather than the ban on short selling. This means that expectations for improved performance of semiconductor companies were more prevalent than short covering to repay stocks borrowed due to the ban on short selling. In particular, it is read in the same context that foreign selling was strong, especially in secondary battery stocks such as Ecopro, which announced performance that fell below market expectations.
(Reporter Ji-seo Jeong, Investment and Finance Department, Yonhap Infomax)
※This content is video news covered in the Yonhap News Economy TV coverage file corner.
This article was published at 10:28 on the Infomax financial information terminal.