South Korea will allow investors to short sell financial stocks from tomorrow, signaling that regulators believe banks and insurers are strong enough to withstand the lifting of a ban imposed during the 2008 crisis.
The restriction is being removed because equities have stabilized since July and the government wants to bolster capital markets, the Financial Services Commission said today in an e-mailed statement. Short sales occur when an investor sells borrowed securities in anticipation of a price decline.
Removing the ban may spur trading volumes that have slumped even as equities recover, eroding earnings at brokerages including Samsung Securities Co. and Daewoo Securities Co. South Korea, which forbade short sales for all stocks in October 2008, lifted the ban for most companies in June 2009, while keeping restrictions on financial stocks.
“This shows the FSC believes in the resilience of Korea’s financial stocks and industry,” Michael Na, a Seoul-based analyst at Nomura Holdings Inc., said by phone. “Unless there’s a real panic situation like the 2008 crisis, short selling will help to reduce market volatility and boost trading volume.”
The regulator will revise rules by June 2014 to enhance disclosure on short-selling positions and ensure violators are penalized. The FSC will closely monitor transactions for financial shares, which account for 12 percent of the value of South Korea’s equity market, it said.
So-called naked short selling, which refers to selling equities without holding them, will continue to be prohibited for all stocks, according to the FSC.
“We expect this will help vitalize the capital market and boost market transparency,” it said. “We want to minimize any ill effects of short selling and maximize its good function by enhancing indirect regulations and lifting the ban.”
The benchmark Kospi index has rallied about 10 percent from an 11-month low reached on June 25. The gauge climbed for a fourth straight month in October, fueled by purchases from foreign investors. It closed 1.6 percent lower today before the statement was released.
Trading volume in South Korea has declined even as shares rose. For financial stocks, the daily average volume was 352.5 billion won ($329 million) in the first half of this year, down from 935.2 billion won in 2008, the FSC said in the statement.
Earnings at domestic and foreign brokerages operating in South Korea shrank to 565.2 billion won in the six months ended June, about a third of the level reported two years earlier, Financial Supervisory Service data show. That was the lowest since the industry posted a 294.9 billion won profit in the same period of 2005. Earnings in the three months ended September were 132.4 billion won, the FSS said this week.
“Removal of the ban will help increase trading volume of financial stocks, which would support the securities industry and asset managers,” Sohn Joon Beom, a Seoul-based analyst at LIG Investment & Securities Co., said by phone. “The move is evidence that South Korea is confident about its stock market.”