The South Korean financial regulator recently announced plans to impose heavy fines on two Hong Kong-based investment banks for their involvement in naked short-selling. Naked short-selling, which involves short-selling stocks without proper borrowing arrangements, is prohibited by the Capital Markets Act in South Korea. The Financial Supervisory Service (FSS) of South Korea did not disclose the names of the banks but stated that one was involved in naked short-selling transactions of 40 billion won ($29 million), while the other engaged in transactions of 16 billion won ($11.8 million).
According to FSS Deputy Governor Kim Jung-tae, the regulator considers this to be intentional and illegal short-selling. He emphasized that the banks were involved in these illegal activities for an extended period of time. Mr. Kim stated that the FSS does not believe these actions are due to a lack of understanding of regulations. The violations committed by the banks spanned nine months through May 2022 and five months through December 2021, respectively.
The FSS has not provided the exact figures for the fines but indicated that they are likely to be record-breaking. One of the banks placed short-selling orders for 101 shares worth 40 billion won ($29 million) over nine months, and the other bank engaged in similar activities with nine stocks worth 16 billion won ($11.8 million) between August and December 2021.
The FSS expressed its concern that these illegal acts counter South Korea’s efforts to create a favorable environment for foreign investors. The regulator emphasized the need for stern measures against such cases and the development of specific measures to prevent their recurrence. The FSS has requested the two unnamed investment banks to adjust their trading systems in accordance with local regulations and is considering collaboration with foreign regulatory authorities to prevent similar incidents in the future.
South Korean President Yoon Suk-yeol, who took office in May 2021, has previously emphasized the importance of closely monitoring stock short-selling to prevent market instability. Last year, the FSS also initiated an investigation into short selling by foreign banks, including the Seoul branch of Morgan Stanley & Co International Plc.
In conclusion, the South Korean financial regulator is taking strong action against two Hong Kong investment banks involved in naked short-selling transactions. The regulator considers these actions to be intentional and illegal, and it intends to impose significant fines on the banks. The FSS is committed to creating a favorable environment for foreign investors and will collaborate with foreign regulatory authorities to prevent similar incidents in the future.