Market watchdog to tighten grip over illegal short selling

South Korea’s market watchdog Financial Supervisory Service on Tuesday vowed to toughen its supervision of illegal short selling this year to promote fair market competition.

“We will ramp up inspections on illegal practices of short selling by strengthening the work capacity of our special investigative team in charge of detecting securities fraud,” the FSS said in its 2021 policy plan. The FSS has a team of in-house investigators focused on probing financial crime cases under the supervision of the prosecution. Unlike the prosecution and the police, however, the team has no prosecuting authority. 

The remarks came amid a severe backlash from inexperienced day traders over the government’s plan to resume the short selling of shares on the Kospi 200 and Kosdaq 150 from May 3.

An online petition on the Blue House website demanding an outright ban on short selling has gained more than 200,000 signatures in 30 days -- a condition that requires a relevant high-level government official like Financial Services Commission Chairman Eun Sung-soo to respond.

Short sellers sell borrowed shares of a stock with the belief that the price will drop. Korean retail investors have long criticized rampant irregularities by foreign and institutional investors in the market such as naked short selling -- selling short a stock or other tradeable security without first borrowing the security. 

Ahead of the FSC’s action plan to control soaring household debt slated for next month, the supervisory agency also pledged to impose tougher rules for the debt service ratio, or DSR -- the maximum amount of credit loans allowed for an individual compared to household disposable income.

“The envisioned scheme to curb household debt will be implemented while (guaranteeing benefits of) lending services to virus-battered low-income families and small merchants,” the FSS said. 

Meanwhile, under the slogan “inclusive finance,” the FSS is planning to urge both traditional lenders and online-only banks to expand their loan products to borrowers with low credit scores.

In preparation for the post-COVID-19 market changes in which companies place a higher emphasis on ESG (environment, social and governance) values, the authority will develop a stress test model that assesses climate-related risks of financial systems, through various partnerships with supervisory bodies in major economies, officials said. 

By Choi Jae-hee (cjh@heraldcorp.com)