Korea Exchange to Exempt Top 100 Stocks From Investment Warning Rules

The Korea Exchange plans to widen exemptions under its market surveillance enforcement rules. With volatility rising in South Korea’s stock market and concerns growing that even large-cap shares could be flagged, the bourse will fully exclude the top 100 stocks by market capitalization from both investment warning designations and advance warning lists.

According to the financial investment industry on May 19, the exchange released a proposed amendment to the rules a day earlier. Investment warning designations are market-stabilization measures intended to alert investors to risk and curb unfair trading before it occurs. They apply to stocks judged to require caution, including those that surge sharply over a certain period.

The amendment would add subparagraphs 3 and 4 to Article 3-3, Paragraph 4 of the enforcement rules. New subparagraph 3 would add to the exemption criteria any stock ranked in the top 100 by market capitalization as of the previous day among all listings on the KOSPI and Kosdaq markets.

Late last year, the exchange revised the rules to exclude the top 100 stocks by market capitalization from investment warning designations only under ultra-long-term and unsound-trading criteria. The latest proposal deletes that limited exception and expands the exemption to cover all investment warning criteria. That would reduce the burden of such designations for large listed companies.

The revision also creates a discretionary exemption for the chair of the Market Surveillance Committee. Under new subparagraph 4, a stock may be exempted if the committee chair determines that an investment warning designation or advance notice would be clearly inappropriate in light of abrupt market changes or the need to protect investors. That opens the way for stocks outside the top 100 by market capitalization to be excluded as well, depending on the committee’s judgment.

A Korea Exchange official described the discretionary exemption as "a safeguard typically put in place for highly unusual and unexpected situations in the market." The latest revision, the official said, is intended to prepare for the possibility that large-cap stocks near the top of the market-cap rankings could be designated for investment warnings as the domestic stock rally has continued.

The exchange will gather comments through May 25 before finalizing the revision after completing related procedures.

Oh Se-seong, Hankyung.com reporter sesung@hankyung.com