The Financial Services Commission, the Financial Supervisory Service, and the Korea Exchange introduced joint measures to stamp out unfair trading activities in stock markets on July 9. The financial authorities have held a series of meetings and discussions in the past month to seek ways to strengthen initial response and ensure strict punishment on unfair trading activities (price manipulation, etc.). The following measures have been prepared based on these discussions.

Key Measures

I. Establish a Joint Response Team to Root Out Stock Price Manipulation

Under the current response system for unfair trading activities, the examination (KRX) and investigation (FSC & FSS) functions are dispersed across different organizations, and they each have different levels of authority, for instance, to check financial (securities or bank) accounts or force investigation. This led to the problem of delay in responding to cases which required urgent actions from the authorities. Thus, in order to boost the efficiency in examination and investigation, the FSC, the FSS, and the KRX plan to establish a joint response team to root out stock price manipulation.

The joint response team, a collaborative operation among the FSC, the FSS, and the KRX, will be set up at the KRX with an aim to bolster the initial response function of KRX’s market surveillance committee. The joint response team will work under the same workspace and perform investigations on important cases that require urgent response together from the early stage. In the process, each organization (FSC, FSS, and KRX) will make utmost use of its investigative authority to promptly carry out investigations on cases associated with (a) frequent rule-breakers, (b) largest shareholder or company executives, (c) use of false information on social media, etc.

II. Upgrade KRX’s Surveillance System to Make It More Individually-focused (from account-based system currently) and Adopt AI Technology in Market Surveillance

Under the current system, the KRX performs market surveillance on individual accounts on virtually all transactions without the ability to make use of investors’ personal information (resident registration number in pseudonymized form). Improvements need to be made to this “account-based” surveillance system because under this system, surveillance targets are way too excessive and it remains difficult to identify activities carried out by the same entity. Thus, the financial authorities plan to revise the Enforcement Decree of the Financial Investment Services and Capital Markets Act (FSCMA) to enable the KRX to make use of investors’ personal data in pseudonymized form, which will be linked to the accounts under surveillance for carrying out market surveillance on individual basis.

This transition from the current “account-based” to an “individual-centered” approach will significantly boost the efficiency in market surveillance as it will help to narrow down surveillance and examination targets by about 39 percent. Moreover, the transition to an “individual-centered” surveillance system will help the authorities to more effectively and quickly find out and identify whether certain activities have been carried out by the same entity, what and how much role did the rule-breaker play in manipulating stock prices, and whether there was cross trading involved.

Moreover, the authorities plan to seek further advancement of the market surveillance system by adopting artificial intelligence (AI) technology. With the use of AI, the authorities will bring about improvements to the criteria being used to make decisions on the type of charges in unfair trading activities, which will help to lay foundations to strengthen response capacity against increasingly sophisticated methods of unfair trading activities.

III. Make Active Use of Administrative Sanctions on Unfair Trading Activities to Effectively Force Out Rule-breakers under the “One Strike Out” Principle

Recently, various administrative sanctions mechanisms have been introduced to enable the authorities to more effectively respond to unfair trading activities. These mechanisms include account freeze, penalty surcharge, and restrictions from engaging in financial investment transactions and from serving as an executive at a listed company. The financial authorities plan to actively employ these sanctions mechanisms to more effectively collect illegitimately gained profits and dispel rule-breakers from capital markets.

In particular, during the investigation stage, if it is highly suspected that there exist illegitimately gained profits in an account, the authorities will quickly move to freeze account activities to minimize further damage to the market. Moreover, the authorities will impose a penalty surcharge (maximum 200 percent of unfairly gained profits) to collect illegal proceeds and eliminate a room for unfair trading activities. If largest shareholders or company executives have been found to be involved in major unfair trading activities, the financial authorities will make sure that their wrongdoings are widely known to the public to help raise investor awareness and to prevent further damages from taking place from similar cases in the future.

In addition, major violations of short sale regulations that are linked to unfair trading activities can be subject to a penalty surcharge equivalent to up to 100 percent of short sale order amount. Moreover, the authorities plan to strictly deal with short sale violations through sanctions against institutions (e.g. suspension of business operation and restriction from trading financial investment products).

IV. Make Improvements to Seek Timely Delisting of Underperforming Companies

If the dispelling of poorly performing companies gets delayed, it can not only be damaging to the growth and confidence of stock markets but also turn into a source of market abuse in unfair trading activities. Thus, the authorities plan to strengthen the criteria that companies need to follow to keep their listing status and streamline the current delisting process to seek timely removal and delisting of poorly performing companies.

In this regard, the current market capitalization and sales (profitability) requirements will be adjusted upward in stages to an effective level. In addition, companies on the cusp of delisting due to inadequate presentation of audit reports will face a tightened timespan to demonstrate improvements if they wish to avoid delisting. In this regard, companies with inadequate audit reports for two consecutive times will become immediately subject to delisting. To make the current delisting review process more efficient, the KOSDAQ delisting review will be shortened to a two-stage process from the current three-stage process. These regulatory improvements will take effect immediately (from July 10) once the FSC approves revisions to the KRX listing rules.

Further Plan

With the announcement of these measures, the financial authorities will work to proactively detect illegal activities and strictly punish rule-breakers under the principle of zero tolerance to more effectively root out unfair trading activities in capital markets. The authorities plan to promptly carry out revisions to relevant rules and seek system advancement to boost the effectiveness in response capacity, while making constant efforts at market oversight and supervision under the principle of “one strike out.”

* Please refer to the attached PDF for details.