Korea’s top regulator detects more foreigners’ naked shorting

South Korea’s top financial regulator is detecting more circumstances of naked short-selling worth tens of millions of dollars by foreign investment banks as the country has stepped up investigation into the illegal trades, by which investors sell shares without first borrowing them or determining they can be borrowed, its chief said on Thursday.

“(Investigations) on most cases are nearly in final stages,” Financial Supervisory Service (FSS) Governor Lee Bokhyun told reporters. “We plan to explain the results of the investigations to reporters and the public soon and reflect them on the ongoing move to reform the short-selling system.”

Last month, the Financial Services Commission (FSC), another financial watchdog, slapped a combined 26.5 billion won ($20.4 million) in fines, the largest penalty for the illegal short-selling practices, on BNP Paribas SA, its Korean brokerage unit and HSBC Holdings plc.

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

To support the probe, FSS Governor Lee said the regulator plans to dispatch a large number of staff to a local prosecutor’s office in Seoul.

Naked short-selling is a trading practice banned in South Korea and some other countries since the late 2000s. In November 2023, Seoul completely prohibited short-selling in the domestic market until June of this year in response to increasing cases of short-selling practices by hedge funds and other institutional investors.

SHORT-SELLING BAN TO BE EXTENDED

President Yoon Suk Yeol said the government will extend the ban until the side effects of short-selling are fully resolved.

“We will lift the ban only when an electronic system, which can eliminate the side effects, is established,” Yoon said. “Otherwise, we will continue to prohibit it.”

Earlier this week, he said the government will build a thorough computer system so that the stock market can eliminate its stigma as a playground for institutions and foreigners.

The FSS will explain regulators’ probes on short-selling to investment banks in global financial centers such as Hong Kong, Lee said.

“I or anyone in charge will go to Hong Kong and explain the investigations and problems caused by short-selling in markets,” Lee said.

Separately, the FSS is poised to probe sellers of equity-linked securities (ELS) tracking Chinese shares listed on the Hong Kong bourse, which are expected to force retail investors to suffer huge principal losses, Lee said.

The Hang Seng China Enterprises Index has more than halved to 5,649.23 points as of Thursday from a high of 12,106.77 on Feb. 19, 2021.

The FSS last month inspected financial institutions including KB Kookmin Bank, the country’s largest lender.

“Some sellers had problems such as limit-related conditions, adjustments of key performance indicators for sales and failure to keep contract documents,” Lee said. “We plan to launch investigations into major sellers as soon as possible.”

“They will inevitably take responsibility if they did not comply with suitability rules in substance but only perfunctorily adhered to procedures.”

Write to Sang Hoon Sung at uphoon@hankyung.com
 

Jongwoo Cheon edited this article.