SEOUL, April 25 Reuters South Korea39;s financial market watchdog said on Thursday it was checking the effectiveness of a new monitoring system designed to detect illegal shortselling of domestic stocks before lifting a ban on such trades.

South Korea39;s Capital Markets Act bans 39;naked39; shortselling of stocks, in which an investor sells shares without first borrowing them or determining they can be borrowed.

The new system will electronically process all shortselling transactions by institutional investors and filter them through a central detection system set up at the stock exchange operator, the Financial Supervisory Service FSS said. Illegal short selling has been one of the major factors behind the 39;Korea discount39;, by undermining market credibility among domestic investors, its governor, Lee Bokhyun, said in remarks prepared for delivery on Thursday.

South Korea39;s reforms aim to resolve the socalled Korea discount, which refers to domestic companies39; lower valuations than global peers stemming from factors such as low dividend payouts and opaque governance structures.

With this doublelayered checking system working properly, we hope it will root out illegal short selling, Lee said in the statement, issued ahead of an event to explain the new system to market experts and retail investors.

The regulator added that adoption of the new system would follow swift final checks, but did not give a date.

The ban on short selling of shares runs through…