South Korea's financial regulator said Sunday that it will temporarily ban stock short selling until the second half of next year, amid efforts to crack down on illegal short selling by global investment banks.

The move will be effective as of Monday and until the start of July 2024, according to the Financial Services Commission.

"(The FSC) has decided to fully suspend stock short selling until (the end of) the first half of next year since there exist concerns that the expansion of market volatility and illegal short selling practices may undermine market stability and fair price formation," FSC chief Kim Joo-hyeon told a joint press briefing with the head of the Financial Supervisory Service, Lee Bok-hyun.

The financial regulators highlighted "growing external uncertainties" fueled by a global slowdown and the war between Israel and Hamas that they said are causing concerns in the domestic market.

"Under such conditions, concerns over the fair pricing of stocks in the local stock market remain very high as illegal naked short selling by foreigners and institutional investors continues to get exposed repeatedly despite our continued efforts so far to improve the system," the FSC said in a press release.

The FSS announced last week a plan to form a special task force to inspect all global IBs for illegal short selling. The move came after the financial watchdog exposed two Hong Kong-based IBs suspected of short selling 56 billion won (US$42.7 million) worth of stocks while being aware that they would not be able to borrow the shares sold.

The FSC said the government will work to reform the system by the end of June 2024 so that short selling will no longer create what many here, including ruling party lawmakers, have claimed to be an "unlevel playing field."

"It will review alternative ways to establish a system that will prevent illegal naked short selling in real time," it said. (Yonhap)