The Financial Services Commission (FSC) announced on March 14, 2012 that it would be introducing a reporting system, by way of amendments to the Enforcement Decree for the Financial Investment Services and Capital Markets Act, for massive short selling positions, pursuant to which investors will be required to submit reports with data on their short selling positions and changes in such positions whenever their short selling positions exceed a specified level. Under the new system, the relevant reports will need to be filed to both the FSC and the Korea Exchange (KRX).
Under Article 208, Paragraph 2, Subparagraph 3 of the amended Enforcement Decree, the reporting system will apply to convertible bonds, bonds with warrants, participating bonds, exchangeable bonds, equity securities, beneficiary certificates, derivatives linked securities, depositary receipts relating to any of the foregoing and such other categories of securities as the FSC may designate from time to time through appropriate public notification. According to the FSC, the reporting system is needed due to the substantial impact that large short selling positions can have on the overall stability of the securities market and the fairness of market pricing. Under the new reporting system, a party who makes or intends to make massive sale orders that exceed a certain level (as determined by the FSC) will be required to submit a report on the details of such massive short selling position to both the FSC and the KRX in accordance with the procedure and format prescribed by the FSC for such purpose.
While the above-mentioned amendment of the Enforcement Decree will establish the basis for legally imposing such massive short selling position reporting obligation, the details of the specific standards that will apply when the reporting system is implemented have not yet been determined. For example, such matters as the level at which the reporting requirement will be triggered, the timing of report filings and the reporting method and format, etc. are still under consideration and the FSC is in the process of collecting opinions and analyzing analogous systems used in other jurisdictions in connection with its preparation of the relevant standards and detailed requirements, which will be reflected in the Financial Investment Business Regulations after the FSC has made the relevant determinations. At present, the massive short selling position reporting system is expected to be implemented sometime in the third quarter of 2012.
The FSC’s introduction of this new reporting system for massive short selling positions is seen as an initiative by the FSC to improve the compatibility of Korea’s regulatory system with global systems and, in particular, to align Korea’s regulation of short selling with internationally recognized standards, such as the “Four Principles of Short Selling Regulation” announced the International Organization of Securities Commissions (IOSCO).
In October 2008, pursuant to the onset of the global financial crisis of 2008, the FSC broadly imposed a prohibition against the short selling of KOSPI and KOSDAQ securities, with the exception a few categories of securities, such as ELW and ETF. Afterwards, beginning in June 2009, the FSC lifted the short selling restriction with regard to non-financial stock. Subsequently, the FSC temporarily again imposed an across-the-board prohibition against the short selling of KOSPI and KOSDAQ securities from August through November of 2011, after which the FSC for the most part reverted to the less restrictive policy that had been in effect prior to August 2011. A general prohibition against the short selling of financial stock has remained in effect since October 2008.