The Korean Stock Exchange will be handed new powers to withdraw "overheated" stocks that receive “extraordinary increases in short selling and sharp falls in prices” during a single day for a 24-hour cooling off period, as outlined in a statement by Korea’s Financial Services Commission (FSC) in November 2016.
Detailed conditions for the definition of “overheated” will be determined and announced soon.
In addition, the new rules dictate that securities to be short sold must be pre-delivered to the client’s account. This amends the current rule that entities that violate short selling rules must submit the “agreement of securities borrowing” or to pre-deliver securities to be sold, before making further short-sell trading.
According to the Korea Exchange the new rules will help to mitigate information asymmetry in short selling, while forcing short selling violators to pre-deliver securities prior to short-selling will enhance the effectiveness of penalties and bolster market transparency.
The FSC promised to strengthen sanctions against those who violate its short selling rules.
Rules such as the prohibition of uncovered short-selling and up-tick rules will be subject to “heftier fines” than those imposed on other violations.
In addition, those that short a stock during the period of paid-in capital increase will be barred from buying the newly-issued stocks.
Furthermore, price manipulative activities exploiting short-selling positions will be added to types of ‘market disruptive activities’ under the Financial Investment Services and Capital Markets Act.
The rule changes come as part of wider-spread reforms of South Korea’s financial framework.
Previously, in late 2016, the deadlines for reporting and disclosure of short positions in large amounts or by shares was shortened from T+3 to T+2.