South Korea announces major crackdown on illegal short selling, including jail

South Korean regulator, the Financial Services Commission, announced the passage of a revision bill that focuses on regulating illegal short sale activities including naked short selling.

Key provisions include imposing heavier fines and criminal penalties. To strengthen punishment, penalty surcharges will be imposed up to the amount of short orders as well as criminal penalties of a minimum one year of imprisonment or a fine of more than three times and up to five times the avoided loss amount.

The introduction of strict monetary sanctions and criminal penalties will help prevent intentional attempts at illegal short sales while preventing investor errors and mistakes, according to an FSC statement.

Other actions included requirements to keep records of securities lending agreements for five years for submission to authorities on request; restricting short sellers’ participation in equity financing; and strengthening regulation on short sale bans.

Once the revision to the Financial Investment Services and Capital Markets Act is approved at a cabinet meeting, it will go into effect three months after promulgation. In the meantime, the FSC will work on the amendments to lower regulations to “ensure a seamless implementation”.

In close coordination with the Korea Exchange, the FSC will also work on the development of a real-time illegal short sale detection mechanism, require mandatory inspection for illegal short sales every month and increase the number of personnel responsible for monitoring.

Read the full statement

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