BNP Paribas, HSBC fined $20.4 million in Korea for naked short-selling

South Korea’s financial regulator has slapped a combined 26.52 billion won ($20.4 million) in fines on BNP Paribas SA, its Korean brokerage unit and HSBC Holdings plc for naked short-selling, a practice banned in the Asian country.

The Financial Services Commission (FSC) said on Monday its decision-making body, the Securities and Futures Commission (SFC), found that BNP and HSBC violated Korea’s Capital Markets Act by engaging in naked short-selling – a practice of selling short without first borrowing the necessary securities.

The amount is the largest ever since Korea introduced penalties for illegal short-selling practices in April 2021.

“The violations are a grave matter that hurts the market order and investor trust,” the FSC said in a statement.

The regulator said it would also request a criminal investigation by prosecutors into the two global investment banking firms' Hong Kong units.

Under the Capital Markets Act, those involved in naked short-selling are subject to one year in prison or a fine of three to five times the gains earned from such practices.

BREAKDOWN OF FINES

The FSC said it has fined BNP Paribas’ Hong Kong office about 11 billion won – the largest amount for a single company related to naked short-selling – and imposed a fine of some 8 billion won on its Korean brokerage unit.

The regulator said BNP Paribas Hong Kong engaged in naked short-selling of 101 stocks, including mobile platform giant Kakao Corp., worth 40 billion won without first borrowing those shares between September 2021 and May 2022.

When it was engaged in short-selling, BNP Paribas was aware that it didn’t have enough shares, according to the FSC.

The French multinational bank’s brokerage unit in Korea, which carried out naked short-selling as requested, didn’t take any action even when it was aware of the possibility of breaking Korean law, the regulator said.

HSBC’s Hong Kong office was slapped with about 7.5 billion won in fines for its involvement in the naked short-selling of nine shares, including Hotel Shilla, worth 16 billion won from August to December 2021.

“The naked short-selling transactions by the three parties lasted for months, thus were viewed as not inadvertent but intentional,” the regulator said.

FULL BAN ON SHORT-SELLING UNTIL JUNE 2024

Naked short-selling is a trading practice banned in Korea and some other countries since the late 2000s.

Last month, the FSC said it would completely ban short-selling in the domestic market until June 2024 in response to increasing cases of short-selling practices by hedge funds and other institutional investors.

The largest financial penalty related to naked short-selling was 3.9 billion won imposed on Austria-based Erste Asset Management GmbH in March. The firm was found in 2021 to have illegally shorted shares of battery materials maker EcoPro HN Co. worth 25.1 billion won that they hadn’t borrowed.

Public sentiment against naked short-selling is negative in Korea, with retail investors staging protests and calling for action to counter short-selling activities.

Through related financial agencies, the Korean government plans to build an advanced computerized system to detect illegal short-selling and strengthen its financial market monitoring.

Write to Han-Gyeol Seon at always@hankyung.com

In-Soo Nam edited this article.