Key Takeaways
- • South Korea's Financial Services Commission is implementing a comprehensive capital market reform plan that includes splitting KOSDAQ into a two-tier system with promotion and demotion mechanisms to improve market quality and eliminate insolvent companies.
- • The reform introduces stricter delisting criteria and structural changes designed to address the persistent "Korea Discount"—the valuation gap between Korean equities and global peers despite South Korea's status as an advanced economy.
- • Short sale regulations are being fundamentally reformed to prevent illegal naked short selling activities, with the government lifting temporary bans and implementing electronic monitoring systems and stricter institutional investor restrictions in response to repeated large-scale violations.
- • Tax incentives targeting institutional investors are being paired with listing reforms, including resumption of short selling under new oversight protocols and the introduction of over-the-counter (OTC) brokerage services to enhance market competitiveness.
- • The government is pursuing 24-hour onshore foreign exchange trading by mid-2026 as part of broader efforts to dismantle capital market controls and improve regulatory clarity and predictability for both domestic retail and foreign institutional investors.
Summary
South Korea's Financial Services Commission has unveiled a comprehensive capital market reform initiative aimed at structurally improving the nation's equity markets and addressing long-standing competitive disadvantages. The reform plan targets the KOSDAQ market—the country's secondary exchange—with the introduction of a two-division system that will incorporate promotion and demotion mechanisms to enforce higher listing standards and remove insolvent companies from trading. This structural change represents a significant shift in market governance, designed to restore confidence in the KOSDAQ brand, which has suffered from repeated scandals involving poor-quality listings and unfair trading practices.
A central pillar of the reform addresses the persistent "Korea Discount," the significant valuation gap at which Korean equities trade relative to global peers despite South Korea's status as an advanced economy. Government and regulatory officials have acknowledged that insolvent companies remaining listed on major exchanges undermine the overall market's credibility and institutional investor confidence. The reform prioritizes the systematic removal of failing firms and improved corporate governance standards, recognizing that short-term investor pain from delisting actions is necessary to revive the long-term brand value and attractiveness of Korean capital markets.
Short sale regulation constitutes another major reform component. The government imposed a temporary ban on all short selling effective from November 6, 2023, which was extended through March 30, 2025, following repeated discoveries of large-scale naked short sale activities that threatened fair price formation. Under the new framework, short selling will resume under enhanced electronic monitoring systems and stricter oversight protocols. The reforms respond to distinct stakeholder demands: foreign and institutional investors have called for regulatory clarity and predictability, while retail investors—who represent a larger share of the Korean market than in most developed markets—have demanded robust transaction monitoring and limits on institutional investor stock repayment periods.
The reform package also includes tax incentives aimed at institutional investors paired with listing reforms, including the introduction of over-the-counter (OTC) brokerage services to enhance market functionality. Additionally, the government is pursuing 24-hour onshore foreign exchange trading by mid-2026 as part of a broader effort to dismantle legacy capital market controls. These changes represent an effort to simultaneously strengthen market infrastructure, improve regulatory predictability for international participants, and address the structural deficiencies that have constrained South Korea's capital market competitiveness.
A central pillar of the reform addresses the persistent "Korea Discount," the significant valuation gap at which Korean equities trade relative to global peers despite South Korea's status as an advanced economy. Government and regulatory officials have acknowledged that insolvent companies remaining listed on major exchanges undermine the overall market's credibility and institutional investor confidence. The reform prioritizes the systematic removal of failing firms and improved corporate governance standards, recognizing that short-term investor pain from delisting actions is necessary to revive the long-term brand value and attractiveness of Korean capital markets.
Short sale regulation constitutes another major reform component. The government imposed a temporary ban on all short selling effective from November 6, 2023, which was extended through March 30, 2025, following repeated discoveries of large-scale naked short sale activities that threatened fair price formation. Under the new framework, short selling will resume under enhanced electronic monitoring systems and stricter oversight protocols. The reforms respond to distinct stakeholder demands: foreign and institutional investors have called for regulatory clarity and predictability, while retail investors—who represent a larger share of the Korean market than in most developed markets—have demanded robust transaction monitoring and limits on institutional investor stock repayment periods.
The reform package also includes tax incentives aimed at institutional investors paired with listing reforms, including the introduction of over-the-counter (OTC) brokerage services to enhance market functionality. Additionally, the government is pursuing 24-hour onshore foreign exchange trading by mid-2026 as part of a broader effort to dismantle legacy capital market controls. These changes represent an effort to simultaneously strengthen market infrastructure, improve regulatory predictability for international participants, and address the structural deficiencies that have constrained South Korea's capital market competitiveness.
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