From Thursday, local and foreign institutions will be obliged to make public their identity when they engage in a certain level of short selling on the local bourse.
The new disclosure rule is applicable to stock investors whose short sale of a particular listed company is worth 1 billion won ($856,000) or more. In addition, irrespective of worth, investors whose short-sale balance sheet exceeds 0.5 percent of a particular company’s total stocks issued must go public.
The disclosure items include name, nationality and address, and investors have to publicize those via regulatory filings to the Financial Supervisory Service within three trading sessions. The disclosures will then be put on the home page of the Korea Exchange.
This is a regulatory development in terms of placating local small investors, who have continuously criticized institutions for pulling down the KOSPI and KOSDAQ indexes through habitual short selling.
Short selling is a legitimate trading skill. Institutions can reap gains by dumping borrowed stocks and repurchasing them at lower prices later -- which is called short covering. After making these gains, the institutions hand back the shares to the original holders, such as individuals and public pensions.
During the process, securities firms play the role of brokers, linking stock lenders (the original holders) and borrowers (institutions). Sometimes, securities firms directly carry out short sales as institutional investors.
The core of the new discourse regulation is that rule violators could be levied fines of up to 50 million won.
However, the sanction severity is negligible when compared to ordinary disclosure rule regulations in which perpetrators like those engaging in the falsification of financial statements could be fined up to 2 billion won.
Further, Korea has been relatively lukewarm in reprimanding the disclosure of rule violators. Many institutional violators have been issued just regulatory warnings or the lower level of cautions instead of fines.
In contrast, some advanced countries don’t have an upper ceiling on fines for disclosure rule breaches or levy more than 10 billion won even if it has an upper ceiling.
The maximum 50 million won in fines in Korea may be a negligible sum of money as long as institutions continue to rake in huge gains via short selling.
The fundamental aspect surrounding the short sale issue lies not in the punishment. Local individuals’ anger started from a systematic problem that institutions enjoy exclusive rights to conduct short selling. The core point in public discontent lies in the fact that small investors are banned from doing it in Korea.
The financial authority has to answer their concerns in a reasonable manner through official statements, including an explanation of why it does not think the rule is unduly unfair.
The authority also needs to publicize its logic to allow the public to compare the local rule with global standards. As a comparison, it should explain the difference between the local system and that of the U.S., in which the Securities and Exchange Commission allows individuals to exercise short-selling authority.
Individuals investing in Nikkei equities are also given similar rights under the guidance of the Japanese Financial Services Agency.
The unequal regulation on the Korea Exchange does not coincide with policymakers’ continuous pledge to upgrade and globalize the local capital market. It could also deter individual foreign investors from the Korean bourse.
Apart from the financial authority, the National Assembly cannot free itself from the criticism that they are sitting idly by while the unfair rule remains.
