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FSC gets tough on short-selling

Nov 11,2016
After a number of insider trading cases involving short-selling, the nation’s financial regulatory agency unveiled regulations aimed at keeping a more vigilant watch on short sellers on Thursday.

The Financial Services Commission said that it will disclose a list of stocks that experienced a heavy influx of short sales and suffered drastic falls after the market closed, and then suspend the stocks’ trading the next day.

“Short-selling sometimes led the prices of stocks to go down and the short-sellers profit,” said Park Min-woo, a director at capital markets at the FSC.

“But with the regulation, we will closely monitor the indexes with excessive short-trading, assuming the possibility that the trading may be linked with unfair transactions.”

The move comes after some of Hanmi Pharmaceutical’s investors raked in huge profits through short-selling in September, allegedly through insider trading. Short-selling refers to the selling of a security that the seller does not actually own, and is made on the assumption that a security’s price will fall and will be purchased later at a lower price. The practice isn’t illegal, but the investors’ bet that Hanmi’s shares would fall raised suspicions about illegal trading. In Hanmi’s case, an unusually high number of shares - more than 50,000 - were short-sold in 28 minutes before the pharmaceutical company announced it was terminating a contract with German drug maker Boehringer Ingelheim.

A stock will be added to a watch list with a daylong trade suspension when three conditions are met: transactions from short sale account for more than 20 percent of the entire daily investment; the closing price of a stock falls more than 5 percent compared to the previous day; the share of short sale dealings surged more than 100 percent compared to the average rate in the past 40 trading days.

Along with the designation, due to take effect early next year, the FSC will also ban short sellers from buying new equity securities on a secondary offering if they placed a short position on the stock during the offering period.

Sellers often borrow shares on securities lending for the secondary offering, then buy the discounted shares and return them, a strategy that could generate price differences.

“When a company issues new equity securities, it would see a high influx of short-sellers participating in the offering,” Park said. “But we’ve found that common retail investors suffer a disadvantage from their practice.”

The regulator revised rules on public information disclosure to curb insider trading using nonpublic information.

The Hanmi scandal exposed a legal loophole of the current disclosure system regarding announcements of technology transfer contracts.

When classified as autonomous handling, companies were allowed to release information a day after an important move. But the FSC amended the rule to require public disclosure of technology transfer within a day of company action. Information about patent acquisitions must now be released to investors on the day of action.

“Even if the contract size is smaller, the companies are encouraged to report the issue if the information affects investment decisions,” said Lee Seok-ran, a director at the FSC.

Lee said that pharmaceutical and bio companies were especially of concern since the information disclosure by the sector carries significant weight for the share prices of the companies.

Under the new rule, drug makers are ordered to state contracts in more detail and specify anticipated loyalties at each stage of the contract.


BY PARK EUN-JEE [park.eunjee@joongang.co.kr]


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