Will the Ban on Short Selling Stocks in Korea Extended Beyond End of June 2024?

• On 6 November 2023, the Korean government announced that it will temporarily ban short selling stocks until end of June 2024.

• On 25 April 2024, the FSS unveiled for the first time its plan to build a computer system to prevent naked short selling called NSDS (Naked Short Selling Detection System).

• There is a high probability that the the temporary ban on short selling which currently lasts until end of June 2024, could be extended further to 2Q 2025.

On 6 November 2023, the Korean government announced that it will temporarily ban short selling stocks until end of June 2024. Although the Korean government has not formally made a decision on whether to further extend the timeline, we believe that there is a higher probability that this temporary ban on short selling stocks could be extended further to until 2Q 2025.

On 25 April, the Financial Supervisory Service (FSS) unveiled for the first time its plan to build a computer system to prevent naked short selling called NSDS (Naked Short Selling Detection System). The cost of building the centralized NSDS system is expected to be approximately 7 billion won (US$5.3 million).

The principle is to computerize stock balance management and automatically filter out excessive selling orders. It is estimated that the institutions that must establish a balance management system are 21 foreign companies and 78 domestic companies with 0.01% of the issuance volume or 1 billion won or more. Convincing institutional investors, including 21 domestic and foreign big players who provide Prime Brokerage Service (PBS) services, remains a challenge.

This new computer system will have two main components. The first step involves computerizing all order processing for institutional investors and blocking unleveraged short selling orders. The second step involves a centralized blocking system for unfiltered short selling orders that are not captured in the first step. It is estimated that the first step could take about 3-6 months to complete and the second step could take nearly 1 year.