On Thursday South Korea’s financial market watchdog said it was checking the effectiveness of a new monitoring system designed to find illegal short-selling of domestic stocks before lifting a ban on such trades.
South Korea’s Capital Markets Act bans naked short-selling of stocks, in which an investor sells shares without first borrowing them.
The Financial Supervisory Service (FSS) said, the new system will process electronically all short-selling transactions by institutional investors and filter them through a central detection system set up at the stock exchange operator.
‘Illegal short selling has been one of the major factors behind the Korea discount, by undermining market credibility among domestic investors,” its governor, said Lee Bok-hyun.
South Korea’s reforms focus on resolving the so-called Korea discount, which refers to domestic companies’ lower valuations than global peers stemming from factors such as low dividend payouts and opaque governance structures.
Lee said ahead of an event to explain the new system to market experts and retail investors, ‘With this double-layered checking system working properly, we hope it will root out illegal short selling’.
The regulator added that adoption of the new system would follow swift final checks, but did not give a date.
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