Revised Rules under FSCMA Pave Way for Resumption of Short Sale Transactions on Schedule from March 31

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Revised Rules under FSCMA Pave Way for Resumption of Short Sale Transactions on Schedule from March 31 Feb 18, 2025

The Financial Services Commission announced that the government approved the revision bill for the Enforcement Decree of the Financial Investment Services and Capital Markets Act (FSCMA) at the cabinet meeting held on February 18. This revision is aimed at upgrading rules on short sale practices.

Imposing a Limit on Institutional Investors’ Stock Repayment Period (Article 208-6)

The stock repayment period for institutional investors, which shall be determined by an agreement from both lender and borrower, should not exceed 12 months in total with maximum repayment periods of 90 days for renewal each time. However, in the case of delisting of stocks or suspended trading on the final day of repayment, or when an account-to-account transfer is being restricted, the final day of repayment will be moved to three business days from the day in which the cause of the payment delay is lifted.

Introducing Measures Intended to Prevent Naked Short Sale Activities (Article 208-7)

Corporate entities that have plans to engage in short sales of listed stocks and securities companies that receive and place short sale orders will be obligated to comply with a set of naked short sale prevention measures.

Corporate entities with a net short position balance of 0.01 percent of total issuance volume (excluding net short position balance of less than KRW100 million) or KRW1 billion or more as well as market makers and liquidity providers (institutional investors) will be subject to the following rules. First, they will be required to set up and operate electronic net short position balance management systems to facilitate item-by-item short position balance management and prevent naked short sale activities. Second, they will be required to prepare internal control standards, which should specify details about the role and responsibility of employees, short position balance management system, the recording and bookkeeping of short sale transactions details for at least five years, and the electronic management system. Third, to facilitate inspections by Korea Exchange (KRX)’s Naked Short Selling Detecting System (NSDS), they will be required to submit item-by-item daily short position balance data and securities lending transactions data to KRX within two business days of every business day. Fourth, the submission of requested documents will be required to ensure the verification of naked short selling measures by securities companies, and those becoming newly subject to the duty to set up and operate electronic management system will need to notify of their status.

However, institutional investors that place short sale orders after entering borrowed stocks into their systems—those with no likelihood of engaging in naked short selling—will be exempted from the duty to establish and operate electronic short sale processing system. Moreover, corporate investors that are classified as institutional investors will also be required to prepare internal control standards and submit requested documents to securities companies.

Securities companies handling short sale order transactions on behalf of corporate entities will be required to verify whether the corporate entities are implementing the naked short sale prevention measures as required prior to placing short sale orders and every twelve months thereafter and report verification results to the Financial Supervisory Service within one month from the time of verification.

Other Rule Changes (Article 208 & Article 208-4)

When short sale orders are being submitted to Alternative Trading System (ATS), the same display rules currently in place for KRX will be applied to short sale orders submitted to ATS, which in turn should submit short sale order details to KRX.

In addition, with regard to the acquisition of convertible bonds (CBs) and bonds with warrants (BWs), short sellers will be prohibited from acquiring CBs and BWs issued by the same company from one day after the company discloses its CB or BW issuance plan (D+1) until the day it discloses its issue price. However, as in the case with the currently existing short sale rule on the acquisition of new shares in capital increase with consideration, an exemption will be granted when the volume of purchased shares exceeds that of short sale orders during the aforementioned period.

Further Plan

The revised Enforcement Decree of the FSCMA is scheduled to go into effect from March 31, 2025, along with the expected changes to subordinate regulations on financial investment businesses and the KRX. Major institutional investors at home and abroad have been working on developing their own electronic short sale processing systems and preparing internal control standards to prevent naked short selling in line with the implementation schedule. The KRX’s central monitoring and inspection system, NSDS, has been set up, and it is currently being tested for operation. Relevant system upgrades have also been made at the Korea Securities Depository (KSD) and the Korea Securities Finance Corporation (KSFC) to implement the imposition of limits on institutional investors’ stock repayment period.

The financial authorities and related organizations will continue to work to ensure a seamless implementation of follow-up measures in preparation for the resumption of short sale transactions as scheduled from March 31, 2025.

• Please refer to the attached PDF for details.

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