Korea Exchange to Exempt Top 100 Stocks by Market Cap From Investment Warning Designations

The Korea Exchange is revising its market surveillance enforcement rules to broaden exemptions from investment warning designations. Under the proposal, the bourse would fully exclude the top 100 stocks by market capitalization from both investment warning designations and preliminary warning notices after recent volatility in South Korea’s stock market raised the possibility that even large-cap shares could be flagged.

According to the financial investment industry on May 19, the exchange released the proposed amendment a day earlier. Investment warning designations are a market-stabilization measure intended to alert investors when a stock rises abnormally fast and to help prevent unfair trading. The label applies to stocks the exchange judges to require caution, including shares that surge sharply over a certain period.

The proposal would add Subparagraphs 3 and 4 to Article 3-3, Paragraph 4 of the enforcement rules. The new Subparagraph 3 would exempt stocks ranked in the top 100 by market capitalization as of the previous day among all listed companies on the KOSPI and Kosdaq markets from investment warning designations.

The exchange revised the rules late last year to exempt 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 all investment warning criteria. That would ease the burden tied to such designations for large listed companies.

The proposal also adds an exception clause at the discretion of the chairman of the Market Oversight Committee. Under the new Subparagraph 4, stocks may be exempted if the chairman determines that applying an investment warning designation or preliminary notice would be clearly inappropriate in light of sudden market changes or the need to protect investors. That means stocks outside the top 100 by market capitalization could also be excluded if the committee sees fit.

A Korea Exchange official described the discretionary exemption clause as “a safeguard typically put in place for highly unusual and unexpected market situations.” The broader revision is intended to prepare for the possibility that continued gains in the domestic stock market could trigger investment warning designations for large-cap stocks among the market’s biggest companies, the official added.

The exchange plans to gather opinions through May 25 and finalize the rule revision after completing related procedures.

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