(Bloomberg) — South Korea will prohibit stock short-selling from Monday until June 2024 to allow regulators to “actively” improve rules and systems, the Financial Services Commission said Sunday.
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Trading with borrowed shares will be banned for equities on the Kospi 200 Index and Kosdaq 150 Index until June 30, the commission said in a statement.
South Korea started allowing short-selling of stocks on the two indexes in May 2021 while keeping a pandemic-era ban in place for more than 2,000 equities. Reimposing the full ban on the widely used trading practice could hinder the nation’s efforts to seek an upgrade in a key global index, according to Smartkarma Holdings Pte. analyst Brian Freitas.
“The short-sell ban will further jeopardize Korea’s chances of moving from Emerging Market to Developed Market,” Freitas said. “Expect bubbles to form in pockets of the market that are favored by retail investors as short selling no longer acts as a brake on absurd valuations.”
The financial regulator said there was a need to preemptively respond to growing market uncertainties, and there were concerns that routine naked short-selling could undermine the formation of fair prices. It said authorities have found circumstances of possible naked short selling after discovering cases of the practice by global banks.
Read: Korea to Fine Banks for Naked Shorts; Local Media Name HSBC, BNP
Short selling accounts for a tiny portion of the nation’s $1.7 trillion stock market — about 0.6% of the Kospi market value and 1.6% of the Kosdaq, according to exchange data.
The regulator’s announcement comes ahead of general legislative elections to select National Assembly members in April. Some ruling party lawmakers have urged the government to temporarily end stock short-selling in response to demands by retail investors who have staged protests against the practice.
The investors say short-selling leads to unfair advantages for foreign and institutional investors.
South Korean President Yoon Suk Yeol and his party have campaigned for reforms as they face the upcoming general election, including changes to the pension system and the prevention of market monopolies. Yoon’s popularity edged up in recent months to a high of 34% on Friday, after his support dropped last year.
The regulator’s ban coincides with a nascent recovery in the main South Korean equity benchmark index. The Kospi has rebounded in November after suffering its worst monthly drop in October amid foreign selloffs. The index is still down more than 10% from its August peak.
The small-cap Kosdaq Index also bounced back from the lowest level since January, but it is down 17% from its July peak.
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