Korea Has Finally Lifted A Historic Short Selling Ban Enacted During The Global Financial Crisis

KOSPIREUTERS/Lee Jae-WonAn investor looks at a board showing the stock price index at a brokerage firm in Seoul October 16, 2008. Seoul shares fell more than 9 per cent that day, posting its biggest daily percentage loss in seven years, as the grim world economic outlook and the overnight Wall Street crash made investors dump shares across the board. The Korea Composite Stock Price Index (KOSPI) officially ended down 9.44 per cent at 1,213.78 points, its lowest close since mid-June 2006.

On Wednesday, South Korea lifted a ban on short selling of financials stocks enacted during the global financial crisis in October 2008.

Early in Thursday trading, the Korean KOSPI is up 0.6%, and the only big losers are Daewoo Securities (down 6.6%) and Woori Investment & Securities (down 5.2%).

“The Korean government imposed this ban in 2008 during the Global Financial Crisis,” says Bryan Song, a research analyst at BofA Merrill Lynch. “Originally, Korea forbade short trades for all stocks in Oct 2008 to arrest a slump in equities triggered by the worldwide credit freeze. It subsequently lifted the ban on non-financial stocks in Jun 2009, but kept restrictions on financials — banks, brokerages, other financial firms — as they were presumed to be vulnerable to the still weak and volatile global financial market conditions.”

Why now?

“This action shows that: (1) the government is less concerned about the impact from external elements (i.e., QE tapering); (2) Korean financial companies may be deemed to be in relatively good shape; and (3) the regulatory direction could be less burdensome,” says Morgan Stanley analyst Joon Seok.

Seok and Song both agree that the lifting of the ban shouldn’t have much of an effect on share prices beyond the very short term.

JPMorgan analyst Scott YH Seo believes the lifting of the ban is positive for financials in the long run.

“From an industry perspective, the removal should further help the development of financial products (e.g., introduction of more sophisticated ETF products), as well as the local hedge fund industry,” says Seo. “Considering the above, the overall implications for Korea financials should be short-term neutral but mid/long-term positive in our view.”

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