Financial regulators will be reinforcing regulations on short selling activities in light of continued criticism that ordinary investors are being unfairly affected by short selling activities. Such measures include barring short sellers' participation in the primary market and introducing a overheated short selling stocks system. Reflecting the recent Hanmi Pharmaceutical case, public disclosure rules will also be strengthened to shorten the disclosure timeline. On November 10, 2016, the Financial Services Commission announced a plan to overhaul the short selling regulatory scheme and the public disclosure system in this regard. Financial regulators have further announced measures for segregation of the proceeds from the issuance of derivative-linked securities. The details of the proposed measures are described below.

1. Stricter Regulation of Short Selling Activities – Introduction of Short Selling Heated Item Designation System, etc.

The proposed amendment to the Financial Investment Services and Capital Markets Act (the FSCMA) will provide that investors shorting during the period from the public disclosure of a relevant capital increase up to the issue price fixing date (i.e. three trading days prior to the offering date) will be restricted from participating in the capital increase. Not only directly subscribing for shares in the capital increase, but also seeking indirect circumvention through collusion with other entities participating in the capital increase will be specifically stipulated to be prohibited. The proposed amendment will further designate stocks showing extraordinary increase in short selling and a sharp price fall as overheated short selling stocks and the short selling thereof during the immediately following trading day will be forbidden. Breaches of naked short selling prohibition and up-tick rule will be subject to stricter administrative penalties. If illegal short selling activities are uncovered, relevant investors will be required to deposit selling securities in advance with the investment broker for a set period of time. Further, price manipulative activities exploiting short selling positions will be added to types of market disruptive actions under the FSCMA. The draft amendment bill of the FSCMA is scheduled to be submitted to the National Assembly in the first quarter of 2017.

2. Reinforcement of Public Disclosure Rules – Shortening of Public Disclosure Period

The Korea Exchange (the KRX) public disclosure rules will be reinforced in light of the recent criticism concerning the Hanmi Pharmaceutical case that companies may tend to intentionally delay their disclosures of bad news by abusing the requirement that such disclosure be made by the immediately following trading day. Specifically, the proposed amendment will (i) require that any correction to the already made voluntary disclosures be completed within the same (not following) trading day, (ii) require mandatory disclosure of certain information (which is currently subject to voluntary disclosure) that are likely to have a material impact on investment decision such as technology transfer and introduction, partnership agreement and acquisition of patent rights, and (iii) increase fivefold the penalty for violation of the public disclosure rules. These amendments are expected to be implemented in the fourth quarter of 2016 by way of revising the KRX public disclosure rules.

In order to better manage the risk concerning the securities companies and strengthen the monitoring thereof, the financial regulatory authority is currently in the process of amending the standard internal compliance standards of the Korean Financial Investment Association. The primary aim of this amendment is to mandate segregated management of the proceeds of derivatives-linked securities. Once the new standards are implemented, security companies will be required to (i) maintain segregated management of derivatives-linked securities and hedge assets up to the products concerned, (ii) use the proceeds from the products solely to manage the said products, and (iii) establish and maintain an IT system for implementing the foregoing measures. In addition, the financial regulatory authority has announced a new credit rating guideline for debt securities eligible to be hedge assets. However, these amendments will not include imposing limitations on the total issuance volume of derivatives-linked securities.

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