The South Korean financial regulator said on Sunday that it was considering imposing the heftiest fines on two Hong Kong-based investment banks for their involvement in naked short-selling.
Naked short-selling of stocks—in which investors short-sell shares without first securing a borrowing arrangement or determining they can be borrowed—is prohibited by the Capital Markets Act in South Korea.
South Korea’s Financial Supervisory Service (FSS) did not disclose the names of the banks, which it said were involved in naked short-selling transactions of 40 billion won ($29 million) and 16 billion won ($11.8 million), respectively.
FSS Deputy Governor Kim Jung-tae said the financial regulator deems it “intentional illegal short-selling,” especially considering that the banks were involved in such illegal conduct for “a long period of time.”
The violations committed by the banks persisted over extended periods, spanning nine months through May 2022 and five months through December 2021, respectively. The FSS said they would likely result in record fines without specifying the exact figures.
One of the banks placed orders for short-selling 101 shares worth about 40 billion won ($29 million) over nine months through May 2022. The FSS said the company failed to rectify the error after submitting the order on duplicate calculations.
The other bank made a similar move with nine stocks worth 16 billion won ($11.8 million), which included shares of Hotel Shilla, between August and December 2021. The FSS said the bank entered an illegal contract while getting swap orders from foreign institutional investors.
The FSS told reporters that such illegal acts ran counter to South Korean authorities’ efforts to establish a more favorable environment for foreign investors.
“We need to hit back with stern measures in such cases and come up with specific measures against their recurrence,” an FSS official told The Korea Times.
The two unnamed investment banks have been asked to adjust their trading systems in line with the local regulatory framework, the FSS said, adding that it was also considering collaborating with foreign regulatory authorities to prevent similar cases from recurring.
South Korean President Yoon Suk-yeol, who took office in May last year, has previously ordered thorough supervision of stock short-selling, which many South Korean retail investors have complained has deepened the local stock market’s falls.
The FSS has also launched an inspection into short selling of shares by the Seoul branch of Morgan Stanley & Co International Plc, as well as other foreign banks, in August last year.
