Financial regulators will be reinforcing regulations on short
selling activities in light of continued criticism that ordinary
investors are being unfairly affected by short selling activities.
Such measures include barring short sellers'
participation in the primary market and introducing a
overheated short selling stocks system. Reflecting
the recent Hanmi Pharmaceutical case, public disclosure rules will
also be strengthened to shorten the disclosure timeline. On
November 10, 2016, the Financial Services Commission announced a
plan to overhaul the short selling regulatory scheme and the public
disclosure system in this regard. Financial regulators have further
announced measures for segregation of the proceeds from the
issuance of derivative-linked securities. The details of the
proposed measures are described below.
1. Stricter Regulation of Short Selling Activities –
Introduction of Short Selling Heated Item Designation System,
The proposed amendment to the Financial Investment Services and
Capital Markets Act (the FSCMA) will provide that
investors shorting during the period from the public disclosure of
a relevant capital increase up to the issue price fixing date (i.e.
three trading days prior to the offering date) will be
restricted from participating in the capital
increase. Not only directly subscribing for shares in the
capital increase, but also seeking indirect circumvention through
collusion with other entities participating in the capital increase
will be specifically stipulated to be prohibited. The proposed
amendment will further designate stocks showing extraordinary
increase in short selling and a sharp price fall as
overheated short selling stocks and the short
selling thereof during the immediately following trading day will
be forbidden. Breaches of naked short selling prohibition and
up-tick rule will be subject to stricter administrative penalties.
If illegal short selling activities are uncovered, relevant
investors will be required to deposit selling securities in advance
with the investment broker for a set period of time. Further,
price manipulative activities exploiting short selling
positions will be added to types of market
disruptive actions under the FSCMA. The draft amendment
bill of the FSCMA is scheduled to be submitted to the National
Assembly in the first quarter of 2017.
2. Reinforcement of Public Disclosure Rules – Shortening
of Public Disclosure Period
The Korea Exchange (the KRX) public disclosure
rules will be reinforced in light of the recent criticism
concerning the Hanmi Pharmaceutical case that companies may tend to
intentionally delay their disclosures of bad news by abusing the
requirement that such disclosure be made by the immediately
following trading day. Specifically, the proposed
amendment will (i) require that any correction to
the already made voluntary disclosures be completed within the
same (not following) trading day,
(ii) require mandatory disclosure of certain information (which is
currently subject to voluntary disclosure) that are likely to have
a material impact on investment decision such as technology
transfer and introduction, partnership agreement and acquisition of
patent rights, and (iii) increase fivefold the penalty for
violation of the public disclosure rules. These amendments are
expected to be implemented in the fourth quarter of 2016 by way of
revising the KRX public disclosure rules.
In order to better manage the risk concerning the securities
companies and strengthen the monitoring thereof, the financial
regulatory authority is currently in the process of amending the
standard internal compliance standards of the Korean Financial
Investment Association. The primary aim of this amendment is to
mandate segregated management of the proceeds of derivatives-linked
securities. Once the new standards are implemented, security
companies will be required to (i) maintain segregated management of
derivatives-linked securities and hedge assets up to the products
concerned, (ii) use the proceeds from the products solely to manage
the said products, and (iii) establish and maintain an IT system
for implementing the foregoing measures. In addition, the financial
regulatory authority has announced a new credit rating guideline
for debt securities eligible to be hedge assets. However, these
amendments will not include imposing limitations on the total
issuance volume of derivatives-linked securities.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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