Short-selling monitoring system will take 10 months: FSS

Financial Supervisory Service (FSS) Gov. Lee Bok-hyun speaks during a discussion session held in western Seoul on Monday. [FSS]

Korea's short-selling monitoring system will take about 10 months to be fully ready, the Financial Supervisory Service (FSS) said Monday.

This means that the current ban on short sales may remain in place until the first quarter of next year, as the forthcoming Naked Short Selling Detecting System (NSDS) — which is under development by the FSS and the country’s bourse operator, the Korea Exchange (KRX) — has been cited as a prerequisite for rescinding the prohibition by the government.

The financial regulator is also set to finalize its plan to improve the short trading system, according to FSS Gov. Lee Bok-hyun.

“We will soon announce the final policy revision plan outlined after multipronged efforts to develop a reasonable solution that can be deemed trustworthy by retail investors, institutions and foreign investors,” said Lee in his opening remarks during a discussion session held at the KRX in western Seoul on Monday.

The discussion session, attended by retail investors, government officials and academics, marked the third of its kind following the previous editions in March and April.

The FSS set a target date of next March for the completion of the detection system, saying that “developing a new system and an effective algorithm to detect illegal short trading, and connecting it to a number of [other] systems operated by institutional investors, will take quite some time.”

The agency cited a lack of previous examples and the necessity of negotiations with diverse stakeholders including global investment banks as the reason for the planned 10-month preparation period.

A task force dedicated to establishing a monitoring system was first set up in November of last year, the same month authorities implemented the ban after finding some global investment banks made such trades. The detailed plan for the NSDS was first announced on April 25.

Naked short selling, an illegal practice in Korea, is shorting stocks without first borrowing them. The NSDS is designed to be interconnected with internal short trading balance management systems operated by each institutional investor to detect any illegal selling orders.

The FSS plans to release a guideline for institutional investors to develop their respective balance management systems and internal control systems in June.

As such, the current ban on stock short trading is expected to be extended well beyond the initially planned expiration date of June.

President Yoon Suk Yeol said in January that “the ban on short trading will remain in place until a digital system that can fully prevent any side effects caused by illegal short trading."

The FSS has so far uncovered illegal short-selling cases by foreign investment banks worth 211.2 billion won ($153.5 million) in total. The investigation began in November to scrutinize the trades of 14 global investment banks operating in Korea, with the list of violators whittled down to nine so far.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]