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Korean regulator bans short selling to stabilize financial markets

March 2014 - Finance. Legal Developments by Bae, Kim & Lee LLC.

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Korean regulator bans short selling to stabilize financial markets

In a move to stabilize Korean financial markets that have been battered by last week's U.S. credit downgrade, the Financial Services Commission (FSC) announced on August 9, 2011 that it would impose a temporary ban on all short selling of listed securities traded on the Korea Exchange (KRX), including the main board KOSPI markets and secondary tech-heavy KOSDAQ markets.

On August 10, 2011, the KRX adopted the prohibition on short selling for three months (August 10 to November 9, 2011). At the height of the global financial crisis in 2008, a temporary ban on all short selling had also been imposed in an effort to prevent short selling from destabilizing the local bourse. In June 2009, the FSC lifted the ban at least on covered short selling of non-financial stocks.

Naked short selling is prohibited under the existing rules, so this temporary ban will have the effect of prohibiting all types of covered short selling of securities listed on the KRX such as stocks, convertible bonds, bonds with warrants, equity-linked warrants (ELWs), equity-linked funds (ETFs), warrants and beneficiary certificates (but not straight bonds).

The prohibition, however, does not extend to short selling by (i) liquidity providers to provide quotations, (ii) ETF and ELW liquidity providers for hedging purposes and (iii) futures and options market makers for hedging purposes.

In addition to the temporary ban of short selling, the FSC has also eased restrictions on daily buyback by listed companies of their own shares on the KRX during the same three-month period (August 10, 2011 to November 9, 2011). During that period, listed companies may in one day purchase up to the entire number of treasury shares that has been authorized by its board of directors and reported to the regulatory authority and the KRX.

Currently, listed companies may in one day only purchase up to the lesser of a certain percentage (10%) of the treasury shares reported to the regulatory authority for buyback (or 25% of daily trading volume over 30-day period immediately prior to board approval of buyback, whichever is higher) and 1% of its total issued and outstanding shares.

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