Amendment of KRX Short-Selling Rules

Korea Exchange (KRX) announced September 20 the amendment of short-selling rules in KOSPI Market Business Regulation and KOSDAQ Market Business Regulation. The new rules were established to prevent market abusive short-selling activities and also to support new short position reporting regulations.
Changes in KRX’s new short-selling rules cover 3 major areas;
① Regulatory actions against the investors who have breached relevant short-selling regulations including short position reporting regulations
② Members’ (licensed broker-dealers with membership to access KRX Markets in Korea, hereinafter the same) requirement to investigate those investors who have failed to deliver sold securities on the settlement day (hereinafter “delivery failure”)
③ Scope of individual securities subject to short-selling ban. These new rules will become effective on October 30th of 2012.

1. Regulatory actions against the investors who have breached relevant short-selling regulations.
Before the amendment (current rules): Any investors who have breached relevant short-selling regulations (hereinafter ‘Regulation Breach’) for 2 days or more within last 6 months period or when transaction value affected by the regulation breach is more than 1 billion KRW will be imposed of following action; all members are required to receive proof of stock borrowing (i.e. stock borrowing & lending contracts or agreements) before executing any new short-selling orders sent by those investors. Such regulatory action shall be effective for 30 days (including holidays).

After the amendment (new rules): Although the same regulatory action is to be imposed, duration of the penalty shall be differentiated based on transaction value and number of days affected by the Regulation Breach (please see the table below). In addition, investors who have incurred Regulation Breach for more than 5 days in last 6 months for total transaction value of more than 1 billion KRW will be considered as Significant Breach in short-selling regulations. For those investors with significant breach, members will be required to receive physical position before executing any sell orders (pre-delivery requirement) for 60 days.

Same level of regulatory action shall be imposed on those investors who have breached short position reporting regulations. In this case, there is no limited term period (such as within last 6 months period) to apply the criteria in above table. The transaction value affected by the breach of short position reporting regulations shall be based on daily average value of short-position affected by the breach.

2. Members’ requirement to investigate those investors who have incurred delivery failure on the settlement day.
Before the amendment (current rules): Members are required to further investigate their customers (investors), who have incurred delivery failure on the settlement day (T+2), of any breach in short-selling regulations. However, members’ investigation requirement is exempt on certain cases such as when the delivery failure was incurred by simple errors in instruction statements or by delay in receiving the statements.

After the amendment (new rules): There will be no exemption on Members’ requirement to make further investigation into breach of short-selling regulations.
3. Extending the scope of individual securities subject to short-selling ban.
Before the amendment (current rules): When there are concerns on particular conditions that may undermine the market stability, KRX may ban short-selling, upon approval of Financial Services Commission (FSC), on individual security that meets following criteria;
- KOSPI Market: when short-selling value surpasses 5% of total transaction value of that particular security in last 20 trading days.
- KOSDAQ Market: when short-selling value surpasses 3% of total transaction value of that particular security in last 20 trading days.
After the amendment (new rules): In addition to current criteria for banning short-selling on individual securities, following criteria shall be provided;
- KOSPI Market: when daily average short position ratio in last 20 trading days surpasses 5%.
- KOSDAQ Market: when daily average short position ratio in last 20 trading days surpasses 3%.
Please note that Exchange’s action to impose short-selling ban on individual securities require FSC approval.

Also note that, regardless of above criteria, KRX may ban short-selling on all listed-securities or certain group of listed-securities when deemed necessary due to certain market conditions. Such action also requires FSC approval. As of today, short-selling ban on financial stocks (equity shares) listed at Korea Exchange Markets continues to be effective

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