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Crackdown on illegal short selling takes priority over MSCI listing: FSC vice chair

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Financial Services Commission (FSC) Vice Chairman Kim So-young speaks during a press conference at the Korea Press Foundation in Seoul, Friday. Courtesy of FSC

Financial regulator says windfall tax justified due to monopoly of banks, ELS fiasco irrelevant to financial system risks
By Lee Kyung-min

Eliminating illegal short selling is a task far more pressing than the country making the Morgan Stanley Capital International (MSCI) World list, a benchmark for global stock market funds, the country's financial regulator said, Friday.

The two major issues will be pursued under the long-term goal of advancing the country's financial system, but MSCI listing will be at best a "fortunate byproduct" of Korea's capital market system upgrade, according to Financial Services Commission (FSC) Vice Chairman Kim So-young.

Korea banned short selling, Nov. 6, prompted by illegal naked short selling of 56 billion won ($42 million) by BNP Paribas and HSBC combined. The ban will stay in place until June next year.

Kim justified the need to introduce a windfall tax whereby up to 40 percent of a bank's net interest income exceeding 120 percent of the past five years' average would be sourced for a fund of 2 trillion won. This is, he said, because of the monopoly-protected interest income for the country's 17 commercial lenders, up to 90 percent of which comes from the stable net interest margin (NIM) without innovation efforts or overseas business expansion.

The ongoing fiasco involving the irresponsible selling of high-risk, highly complicated equity-linked securities (ELS) by commercial lenders and brokerages largely concerns retail investors, and therefore does not pose a risk to the country's financial system, he added.


"The upsides to allowing short selling will never be appreciated if illegal naked short selling remains unscrutinized," Kim said during a press conference at the Korea Press Foundation in Seoul.

"We identified the suspected illegal practice despite the current low-tech non-electronic monitoring system. We knew it had been and will continue to be rampant since no consequences are in store. We could not let it go on."

The practice of illegal short selling was essentially unmanageable under the current monitoring systems, he said. This enables many foreign investment banks to continue to rake in undue hefty profits, with Korean share prices ending up being persistently stagnant.

"The underperformance of the local stock market is explained in large part by the illegal practice. This is why a growing number of investors leave in frustration. Some criticized that the ban falls behind global standards, but the Korean capital market is not as advanced as the U.S.' where illegal practices are met with stern punishment. It will take years for the country to establish rigorous market rules."

The MSCI issue is not the priority of the FSC, Kim said, and it is only secondary to capital market advancement.

"Our goal is to promote healthy gains for investors, who then will help listed firms with their operating funds. This in turn will power the growth of the industries and the economy in a virtuous cycle. Those are our objectives."

Lee Kyung-min


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