Financial Supervisory Service, intensive crackdown on illegal short selling… Private CB Special Investigation

The Financial Supervisory Service (FSS) emphasized in its New Year’s work plan briefing that it would strictly stern capital market disruptive crimes, such as abuse of privately placed convertible bonds (CB), and establish market order. It plans to strengthen monitoring of illegal short selling and accounting irregularities.

Lee Bok-hyun, head of the Financial Supervisory Service, announced this plan at a New Year’s work plan briefing held at the headquarters in Yeouido on the 6th, saying, “We will take strict measures against market disruptions that cloud the financial market by taking advantage of the expansion of market volatility, such as the spread of malicious rumors and illegal short selling.” .

The reason why the Financial Supervisory Service is targeting capital market disruption and public livelihood financial crimes is that it judges that the risk of unfair trade practices in the capital market is increasing due to unstable market conditions such as recent interest rate hikes and concerns about economic recession. The Financial Supervisory Service said, “Illegal stock reading rooms that provide false information or manipulate stock prices using stock recommendations as bait using weakened investor sentiment are prevalent, and as demand for financing and mergers and acquisitions by marginal companies increases, large shareholders and stock price manipulators collude. There is a possibility that there will be an increase in illegal inducements from listed companies that falsely or exaggerate their business information.”

◆”Complete investigation of CB issuance”… Rooting out unfair trade

First of all, the Financial Supervisory Service plans to intensively investigate cases with a high risk of unfair transactions, such as private CB issuing companies and marginal companies. It plans to investigate the details of private placement CB issuance and respond organically through the operation of a joint ‘joint response team’ with investigation, disclosure, and accounting departments. In particular, it plans to extensively investigate stocks with high probability of unfair trade, such as frequent CB issuance in the short term and stock price soaring without reasonable reasons at the time of stock conversion.

It will also strengthen monitoring for violations of public disclosure of shares by underwriters of CB and bonds with warrants (BW). This is to prevent cases where large holdings are not reported or delayed despite having acquired CB/BW and owning more than 5% of the corporation’s shares.

In particular, the investment association monitoring function will be strengthened. This is because there have been cases in which people with a history of unfair trade have abused CB/BW through investment associations. The Financial Supervisory Service plans to visualize the connection between investment associations and members and to send notification messages when new shares are disclosed by associations and members related to past events.

Short selling supervisory capacity will also be expanded. The Financial Supervisory Service is planning to establish a detailed balance sheet and a reporting system for short-selling purposes after 90 days to closely monitor short selling.

It will inspect the short selling business process of securities companies, from stock lending to order entrustment, order execution, and follow-up management. Planned investigations on market manipulation and the use of undisclosed information linked to swap contracts and short selling positions, such as total return swaps (TRS) and CFDs, will also be expanded.

In addition, intensive supervision is conducted on major accounting irregularities that have caused social controversy, such as embezzlement, breach of trust, and involvement in unfair transactions. Internal accounting management system supervision will be carried out in earnest for violators, and companies participating in or assisting in accounting fraud will be actively notified to the tax authorities.

In addition, the Financial Supervisory Service is promoting a reorganization of the liquidity risk management system of securities companies in consideration of the recent unstable situation in the short-term fund market. When calculating the liquidity ratio, it is considering introducing a management indicator that reflects stressful situations such as a crunch in the short-term funds market and considers major risk factors such as debt guarantees.

Improve net capital ratio (NCR) regulations, such as differentiating risk values ​​so that the risk characteristics of real estate exposures can be reflected in soundness regulations. The risk characteristics of each business stage and investment type of the real estate development project are reflected in the NCR risk value.

◆Preparation of a supervisory system to respond to new investment environments such as token securities and ESG

He also revealed his ambition to quickly prepare a supervisory system in response to the changing investment environment.

The Financial Supervisory Service plans to revise regulations and forms so that ‘token securities’ such as piece investment can be issued and distributed according to guidelines, etc., and hold a briefing session for the industry. In order to resolve information asymmetry for foreign investors, we are promoting the expansion of English Dart disclosure information.

The Financial Services Commission will also carry out follow-up work to improve the system to protect small investors. The purpose of introducing the insider trading prior disclosure system is maintained, but detailed operating standards are prepared to reduce the burden on those obliged to disclose and increase regulatory acceptance. It is also planning to collect opinions and prepare detailed standards regarding the introduction of measures to protect general shareholders in the event of a management change, such as the mandatory tender offer system.

It is also accelerating preparations for the first alternative exchange (ATS) in Korea. In order to speed up the approval review and prevent market confusion due to the introduction of multiple exchanges, guidelines for best execution duty will be prepared. Investment traders and brokers must establish and publicize the best execution standards (price, commission, possibility of trading) in order to process investors’ subscriptions or orders for trading financial investment instruments.

In line with the abolition of the foreign investor registration system, which is being pursued by the Financial Services Commission, a complete system reform is being promoted, including the introduction of a new operating system, to improve the stability and efficiency of the existing foreign investment management system (FIMS).

The supervisory system in response to environmental changes such as ESG (environmental, social, and governance) will also be reorganized. The International Sustainability Standards Board (ISSB) plans to prepare domestic standards with the Korea Sustainability Board in line with the promotion of the ‘Global Sustainability Disclosure Standards’.

In addition, we plan to regularly disclose the performance of ESG funds and their relevance to ESG, and prepare guidelines for certification evaluation to enhance the reliability and transparency of ESG bond certification ratings.

Improve the registration review process for foreign funds and general private equity funds. It is pointed out that there is a growing demand in the industry for speedy review work and that a fundamental change in the review process is needed, such as drastically improving inefficient work practices. The Financial Supervisory Service plans to expand the manpower by establishing a fund rapid review office, promote computerization of the registration/report review process, and apply the changed system in the second half of the year.

The foreign fund review process is also expedited through computerization. The Financial Supervisory Service is promoting the computerization of the registration, reporting, and examination process of foreign funds and general private equity funds by establishing a fund rapid review office and expanding manpower. The changed system will be applied in the second half at the earliest.

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