South Korea will fully reinstate short selling across all 2,700 listed stocks from March 31, ending a 17-month ban that regulators introduced in Nov. 2023 to curb illegal trading practices and protect retail investors, the Financial Services Commission (FSC) reportedly announced Monday. The government said it has completed regulatory revisions and system upgrades to enhance oversight and prevent market distortions.

To limit excessive volatility, the FSC will temporarily expand the designation of “overheated short-selling stocks,” allowing authorities to halt trading on equities that experience sharp increases in short-selling volume. Regulators said the move aims to prevent market instability, particularly for mid- and small-cap stocks that may face concentrated short-selling pressure.

WHY IT MATTERS

South Korea’s repeated delays on short selling have raised concerns about regulatory consistency, and investors will closely monitor whether authorities follow through on the March 31 reinstatement without further disruptions. The government’s past extensions of the ban — despite earlier assurances of its expiration — have already eroded confidence in South Korea’s financial policymaking. Any missteps in execution or abrupt regulatory interventions could further cement perceptions that Seoul’s financial markets are unpredictable and politically reactive, particularly ahead of South Korea’s inclusion in the FTSE Russell World Government Bond Index later in November.

Global institutional investors, who rely on short selling as a risk management tool, have been scaling back exposure to South Korea due to the extended ban. The return of short selling is a litmus test for whether Seoul is serious about aligning with global market norms or whether additional trading restrictions — such as expanded short-selling suspensions — will undermine investor confidence. The short-selling resumption also coincides with mounting pressures on South Korea’s economy, as the Bank of Korea (BOK) faces limited room for monetary easing amid rising inflation risks.

The won remains highly sensitive to foreign capital flows, and any market instability following the return of short selling could exacerbate currency volatility. If foreign investors react negatively, capital outflows could drive the won lower, raising import costs and fueling inflation, which would further constrain the BOK’s ability to cut rates. A smooth execution of the March 31 policy shift could help reassure foreign investors, but any further disruptions or ad-hoc interventions may deepen skepticism about Seoul’s regulatory direction.