South Korea’s Financial Services Commission decided to fully reinstate stock short selling from March 31, supported by short-sale reform measures and a newly established computerized monitoring framework. To mitigate potential volatility in specific names, the overheated short selling stock designation scheme will be expanded on a temporary, staged basis through May 31, restricting short selling for the following day in stocks that meet specified criteria. From March 31, institutional and corporate investors will be permitted to short sell only if they have put in place required computer systems to prevent naked short selling or, alternatively, submit short-sale orders only after entering borrowed stocks into their accounts, alongside relevant internal control standards. Securities companies must verify these systems and controls before submitting short-sale orders. The Korea Exchange has established a naked short selling detecting system and is running simulations, with 83 institutional investors representing 85.6 percent of pre-ban short-sale activity reported as having established the required mechanisms. Stock borrowing terms will also be aligned for institutional and retail investors, including a 90-day repayment period renewable up to 12 months and a retail cash collateral ratio reduced to 105 percent. Enforcement measures include higher monetary penalties for deliberate naked short selling at four to six times unfair profits, potential aggregated imprisonment where unfair profits are KRW 5 billion or more, restrictions on short sellers acquiring convertible bonds and bonds with warrants during the issuer’s disclosure-to-pricing window, and expanded net short position disclosure already applying to positions of 0.01 percent or KRW 1 billion or more of total issuance volume. Simulations will continue until March 27 to test investor systems and the central detection system, and institutional investors with inadequate development will resume short selling only after required improvements. Investors completing system build-out after April will be required to undergo a two-week verification process linked to the detection system and a further two-week simulation, while the Financial Supervisory Service will conduct a final inspection of securities companies’ verification of investor readiness. Separately, diversified sanctions mechanisms for naked short selling and unfair trading, including trading prohibitions, executive-role bans and account freezes, are scheduled to take effect from April 23, 2025.

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