SKN | Bank of America Highlights Policy-Driven Short-Squeeze Risk Across Asian Equity Markets

Key Takeaways:

• Bank of America has highlighted a growing risk for investors betting against Asian equities as government intervention changes market dynamics in Taiwan and South Korea.
• Taiwan has tightened short-selling requirements and authorized the potential deployment of a NT$500 billion stabilization fund, while South Korea has temporarily relaxed brokerage collateral requirements to limit forced liquidations.
• BofA’s separate foreign-exchange assessment identifies support for the Korean won and Taiwan dollar, reflecting the importance of underlying external balances despite equity-market volatility.

Bank of America (BofA) is drawing attention to a market risk that can complicate bearish positions across Asia: government intervention during periods of severe equity-market stress. Following an artificial intelligence-led selloff, authorities in Taiwan and South Korea introduced measures intended to contain volatility and prevent disorderly selling. In its assessment of the changing environment, BofA highlights how these actions can create additional risks for short sellers. The issue is not simply whether semiconductor valuations have become more attractive or vulnerable, but whether regulatory intervention can rapidly change the mechanics of market positioning.

BofA Identifies Policy Intervention as a Risk to Bearish Positions

Short sellers generally seek to profit from falling share prices by borrowing securities and selling them, with the intention of repurchasing them later at lower levels. However, when authorities restrict short-selling activity or introduce measures that support market demand, the risk profile changes.

Government-backed stabilization purchases can introduce additional demand, while restrictions on borrowed-share transactions can limit the ability of investors to establish or expand bearish positions. If prices recover unexpectedly, short sellers may be forced to close positions by repurchasing shares, potentially accelerating upward price movements. This creates the possibility of a short squeeze, in which rising prices and covering activity reinforce one another.

For BofA, the significance is the potential for policy decisions to disrupt what might otherwise appear to be a straightforward bearish trade. Market fundamentals remain relevant, but regulatory actions can influence liquidity, execution and the timing of price adjustments.

Taiwan and South Korea Introduce Different Stabilization Measures

Taiwan’s Financial Supervisory Commission reduced the permitted volume of intraday short-sale orders using borrowed securities from 30% to 3% of a stock’s average daily trading volume over the preceding 30 sessions. The regulator also increased the minimum short-selling margin requirement from 90% to 130%. Separately, the government authorized its NT$500 billion, approximately US$15 billion, National Financial Stabilization Fund to deploy resources as circumstances warrant. Authorization does not establish that the entire fund has already been invested.

South Korea adopted a different approach. Authorities temporarily waived the requirement for securities firms to maintain a 140% collateral ratio on margin loans for three months beginning November 9. The measure is intended to reduce forced liquidations when falling share prices weaken investors’ collateral. It is not a direct government equity-purchase programme, nor does it eliminate borrowers’ underlying obligations.

BofA’s Currency Assessment Adds a Cross-Asset Perspective

BofA’s broader regional research also provides insight into how the bank views the consequences of the AI-related correction. Claudio Piron, head of Asia foreign-exchange and rates strategy at BofA Global Research, said the substantial current-account surpluses of South Korea and Taiwan provide important support for their currencies. He identified the Korean won and Taiwan dollar as having potential to recover from their recent weakness.

Piron also observed that the Taiwan dollar has a particularly strong relationship with AI-related exchange-traded funds, suggesting that its depreciation reflected investor positioning rather than necessarily indicating a deterioration in economic fundamentals. His currency assessment should be distinguished from an equity-market recommendation.

For internationally diversified investors, the central message is that Asian equity exposure now carries an additional layer of regulatory and execution risk. BofA’s analysis highlights why short positioning cannot be assessed independently of government policy, liquidity conditions and currency fundamentals. The next indicators to monitor include actual stabilization-fund deployment, the duration of trading restrictions, foreign capital flows and semiconductor earnings expectations. For a confidential discussion regarding Asian market exposure and cross-border portfolio structures, contact our senior advisory team.