What are the implications resulting from the recent lifting of the short-selling ban on financial stocks in South Korea?

Bloomberg News Online reported on November 13, 2013 that securities regulators from the Financial Services Commission (FSC) in South Korea are prepared to lift the almost five-year short selling ban rules on financial stocks, starting from November 14, 2013. The short selling ban on South Korea equities trading was instituted in 2008, following the collapse of Lehman Brothers in the United States. At that time, the short selling ban applies across all the companies listed on the Korean Stock Exchange, or KOSPI. The only remaining group that have short selling ban ruling in place are the financial sector stocks, which have remained insulated from short sellers until the latest ruling came along. The move comes as FSC and the South Korean government, led by President Park Guen Hye, are increasingly confident about the country’s economy and the strength of the financial sector. Many investors have increasingly expressed optimism that with the short selling ban lifted, there will be a greater room for more liquidity, trading volume, lower bid-ask spreads, and greater market participation coming both individuals and institutional. The so-called ‘Naked’ short selling rules, or shorting stocks without any form of borrowing, will still be put in place.

For readers who are not familiar with the term ‘short’ selling, it is an equity strategy used by many investors, mostly institutional, hedge funds, among others, to profit on a security, or index decline. Short selling involves the use of leverage, in the form of securities borrowing where a percentage margin charge is being levied on the client for the collateral (security instrument) being borrowed. The client uses the collateral, and goes on to the trading exchange platform to execute his/her trades, with the expectation that the security instrument which the client is shorting will decline. However, if there are any reversals of the trade, say the security instrument starts to rise, the losses will start to mount, depending on the percentage increase in the securities instrument, and the percentage amount of margin being placed on the trade. There are a couple of short sellers who recently make the headlines in the Asia-Pacific region including Mr. Carson Block of Muddy Waters Research, who recently made headlines with his critique of New York-listed Chinese mobile gaming company, NQ Mobile, Inc.

South Korea is not the only country in the Asia-Pacific region that will allow short selling. Other Asia-Pacific region countries including Singapore and Hong Kong have introduced short selling features into their respective exchanges, and trading volumes, including derivatives have seen some increases. With the lifting of the short selling ban, the South Korean government is trying to bolster its financial markets and allowing greater participation in the domestic securities markets. The lifting of the short selling ban is expected to benefit many securities brokers including Samsung Securities Co., and Daewoo Securities Co. which have seen their trading profits sagging in the past. Both companies have expressed their optimism of the impact to their earnings as trading rules are eased, and there is an anticipation of greater trading volume flowing in.

In the November 13 Bloomberg News report, it was also reported that the FSC is expected to revise the short selling rules in June 2014 to include additional disclosures on short-selling positions, and ensure that violators are prosecuted. FSC is also expected to continue to monitor the short selling transactions involving financial stocks, which is said to account for approximately 12.0 percent of the value of the South Korean stock market. Before the ban was lifted, the latest data provided by FSC to Bloomberg News, indicated that the average daily volume for financial stocks was Korean Won (KRW) 352.5 billion (USD 329.0 million) during the first half of 2013, which was down from the KRW 935.2 billion in 2008. Based on this data, it appeared that there could be an upsurge in trading volume for financial stocks once the ban is lifted on November 14.

Overall, the latest ruling by the South Korean authorities is expected to generate greater interest from foreign institutional investors interested in putting their money in the South Korean financial markets. The country, itself, has been in the limelight recently, with quite a number of optimistic economic figures, and outlook. The South Korean arts, music, and culture have also gotten an upsurge in popularity coming from the dramas, movies, and K-pop music, all collectively known as ‘Hallyu’, or Korean Wave. The South Korean economy is also performing strong, with expectations of a 2.8 percent annualised increase in Gross Domestic Product (GDP) in 2013, and 3.8 percent annualised increase in 2014. This is according to projections made by Bank of Korea (BOK). As of this morning, November 14, 2013, during the Asian trading hours, the BOK has held interest rates steady at 2.50 percent. With the lifting of the latest short-selling ban, the South Korean government is determined to open up its financial markets, allowing greater access into its domestic markets, spurring competition among the financial institutions, and boosting securities trading volumes.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

2 thoughts on “What are the implications resulting from the recent lifting of the short-selling ban on financial stocks in South Korea?

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  2. As a finance professional, having worked in the alternative investments industry, and equities trading, I can see that how short selling actually causes some anxieties among the Longs, and non-believers in the idea of short selling a corporate security. The benefits are the usual, namely the creation of liquidity, and depth in financial markets, however, what investors will hope is that there is much corporate transparency coming out from corporations and individual directors in explaining the roles and responsibilities, and should not spend so much capital in deploying mechanisms such as stock repurchases in the bid to provide investor confidence. Historically, when firms encounter such issues and undertake this tactic failed miserably, because they have not came out to address the concerns expressed by investors. It is true that the governments’ and regulators’ roles are to provide confidence in the markets, but they should not try to implement policies that unfairly jeopardise the interests of other investors in order to protect some vested corporate interests of firms. The lifting of the short selling rules in South Korea does signal the gradual economic recovery experienced by many of its people, and also the understanding that free market policies ought to be the general creed that make companies to take reasonable risks and be responsible for their actions, rather than to have ‘Big Brother’ or the Government watching over you.