Concept of Short Selling

Generally speaking, short-selling means the selling of securities that the seller does not own. In Korea, the FSCMA(§180) defines short-selling as follows:

  • A sale of listed securities which the seller does not own (naked short-selling); or
  • A sale of listed securities with an intention to settle with borrowed securities (covered short-selling).

The FSCMA also makes clear stipulations on the range of transactions where the short-selling regulation does not apply by prescribing that, if the seller is supposed to own a security in the future even though not at the moment, the sales of the security is not regarded as short sale because there is no possibility of settlement failure.

According to the FSCMA, each of following items is not be deemed as short-selling:
  • Selling purchased securities, within the purchased quantity, before the settlement date;
  • Selling stocks in case where the stocks to be acquired by exercising the rights of convertible bonds, exchangeable bonds, bonds with warrants, capital increase, and stock dividends, are available for the settlement of the transaction by being listed by the settlement date; and
  • Selling securities deposited with custodian institutions other than the KSD, selling stocks expected to acquire upon termination of a deposit contract for DRs and selling stocks expected to receive by redeeming ETFs as long as there is no possibility of settlement failure on the settlement date
Regulations on Short-selling
  • a. Restrictions on short-selling quotations
    In principle, both naked short-selling and covered short-selling are prohibited in Korea. However, covered short-selling is allowed as an exception subject to certain regulations on quotations and prices (FSCMA §180). That is, quotations for short-selling are allowed for securities borrowed via margin transactions and/or securities lending transactions.
  • b. Receiving short-selling orders
    When a member receives a selling order, the member must; i) identify whether or not the order is a short-selling order, and ii) verify whether the order is backed by the borrowing contract if the order is a short-selling order. Members are required to make a separate mark to the order verifying it as short-selling order and obliged to reject an order that breaches the short-selling regulations. For those investors who have no intention to make short-selling in the market, members may not conduct the verification procedures on sales orders if; i) the member has received the consent not to submit the short-selling order from the customer, and, ii) the member modified the computer program to block short-selling order from the account.
  • c. Regulation on short-selling prices (Uptick Rule)
    Short-selling quotations must be placed at a price at least one tick higher than the last traded price, that is the current market price. However, as an exception, if the last price is higher than the immediately preceding price, short-selling orders can be placed at the current market price. Also, this rule is not applied to short-selling quotations in cases of arbitrage trading, hedge trading by liquidity providers (market makers in the derivatives market), and regular session block trading.
  • d. Post management of short-selling orders
    Members are required to verify those customers who lack the balance securities on the settlement day and receive relevant proof records including securities borrowing contracts from those customers to identify whether the customer has breached the short-selling regulations. Members must record and keep the details for at least 3 years. In addition, if the customer has breached short-selling regulations twice or more within 6 months or the related trading value amounts to KRW 1 billion or more per day, then the member must receive documents of proof such as the securities borrowing contracts or lender's written confirmation whenever the member receives short-selling orders from the customer concerned for next 30 days.