Temporary Ban on Short Selling and Easing Regulations on Enterprises’ Acquisition of Treasury Stocks per day

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The FSC (Financial Services Commission) banned the short selling of all listed stocks for the three months (Aug. 10 – Nov. 9).  A short sale is a sale of a security that is not owned by a seller, but that is promised to be delivered.  Short sellers assume that they will be able to buy the stock at a lower amount that the price at which they sold short.  They bet on a price drop.  If the market falls, they generate profit.  This is why short selling is conducted in a declining market.  After S&P (Standard and Poor’s)’s downgrading of theU.S.sovereign rating and the Euro zone crisis, South Korean stocks sank 142.4 points, or 7.44%.  KOSPI became extraordinarily volatile, and amount of short sales soared.  

http://telegraph.co.uk./

 

http://recent-ecl.blogspot.com/

In the first half of this year, some 100 billion won of short selling were carried out on a daily average.  However, about 400 million won went short afterU.S.woes this month.  Short sellers are mostly foreigners and institutions (almost 97% of the total amount).  Short selling usually accounts for about 5% of the whole transactions.

< Amount of short sales in the Korean stock market >

(KRW)

(unit:100 million)

Sep. 2008

Jun.-Dec. 2009

2010

‘Jan.-Feb. 2011

Jul. 2011

Aug.* 2011

8.1.

8.2.~5.

amount of short selling

2,346

863

1,257

1,608

1,749

1,745

3,253

* On August 3 and 5, short selling was boosted to 432.8 billion won and 432.5 billion won respectively.

In a bearish market, market mechanisms and liquidity could not be guaranteed to prevent panic share declines or outright manipulation.  Short selling can increase market anxiety encouraging stock market players to sell more stocks.  Some people say that it can also act as a catalyst in spreading vicious rumors, and surge of short sales can give rise to failure of settlement and delivery of stocks.  This is the first time in more than two years that regulators temporarily ban investors from shorting shares since the lifting a sanction in the first half of 2009 after the global financial crisis in 2008.

In response to extreme market volatility caused by downgrade of the sovereign rating of the U.S, FSC pledged to bar investors from short selling over the next three months.  According to the Financial Investment Services and Capital Markets Act (FSCMA), the Korea Exchange (KRX) can prohibit short selling with approval by the FSC if there is general concern about harming stability of stock markets and fair pricing in the market. 

In addition, the FSC said that it would ease regulations on enterprises’ buying of their own shares for three months until Nov. 9.

< Eased regulations on enterprises’ acquisition of treasury stocks per day > 

way of acquisition

existing regulations

eased regulations

(direct) acquisition

․ a small number between〔a larger number between① and ②〕and 1% of outstanding shares issued

① 10% of number of reported stock acquisition

② 25% of transactions of stocks on a daily average before the resolution of the board

․within the number of reported stock acquisition

trust acquisition

․1% of outstanding shares issued

․the possible number of stocks to acquire within the total of trusted assets

* To reacquire stocks, the amount should only be within the limits of divisible surplus in commercial law.

It is expected that this implementation will have positive effects on stabilizing the market.  In the short term, the prices of blue chips recently plummeted will rise.  Short sellers must cover in order to close an open short position, then for the next three months, short covering will be promoted.  A great deal of foreign investors’ capital will move to single-stock futures.

Many European market regulators also thought that they needed tighter restrictions.  In France, Spain, Italy, and Belgium, short selling became banned last week.  Some says that it works already for reliving volatility and anxiety.  There is much attention towards how the situation will develop in South Korea.

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