SEOUL - South Korea’s financial watchdog said it has so far uncovered 211.2 billion won (S$210 million) worth of illegal short trades by nine global investment banks, providing its latest formal update on a probe that began late in 2023.
The nine banks, whose names were not disclosed, violated mostly procedural rules while collectively shorting 164 stocks, according to a briefing given by the Financial Supervisory Service (FSS). It is continuing to probe five other banks in the matter.
Two of the nine banks are already facing penalties imposed by the financial authorities and have been referred to prosecutors for further investigation for allegedly violating the nation’s capital markets law, Mr Hahm Yong-il, senior deputy governor at the FSS, told reporters on May 4. The watchdog plans to review penalties on the other seven banks.
Activities of global banks and hedge funds have come under increased scrutiny in recent months in South Korea, as the authorities boost steps to weed out naked short selling – a practice of selling shares without even borrowing them first.
While short selling remains legal in many markets, it is a contentious political issue in the emerging Asian nation, with its powerful retail investors often blaming it for stock declines.
Describing the practice as “rampant”, the authorities in November imposed a ban on all forms of short selling until the end of June 2024, inviting criticism from some investors that the move will hurt the market’s appeal among global funds.
At the same time, a special team was formed to probe all short-selling activities by major global investment banks since May 2021 – when South Korea partially lifted a pandemic-era ban and allowed the resumption of short selling in stocks on the Kospi 200 Index and the Kosdaq 150 Index.
Most short-selling trades by global banks in Korea are aimed at hedging their swap contracts with their end-clients, the FSS said.
Europe-headquartered banks committed more breaches compared to those based in the United States, and most trades under investigation were conducted from their Hong Kong offices, Mr Hahm said. FSS officials plan to visit Hong Kong later in May to update global banks on Korea’s regulations related to short selling.
“So far, most naked short-selling trades by nine banks were related to the management of the stock balance, such as an insufficient number of borrowed shares,” he said.
Most of the violations were not related to the use of undisclosed information or other kinds of unfair trading practices that are subject to criminal enforcement.
Overall, the 14 banks being probed by the authorities accounted for 90 per cent of short-selling trades by overseas firms in the country, according to the FSS.
Regulators are also developing a platform to monitor short selling that can help identify illegal transactions. While the ban imposed in November is slated to remain until the end of June, President Yoon Suk-yeol has recently said restrictions will remain in place until an electronic monitoring system is in place.
The probe launch came after the authorities accused in October two global banks of “routinely and intentionally” breaching short-selling rules in trades totalling 56 billion won. In December, BNP Paribas and HSBC Holdings were fined by regulators for claims tied to short selling.
In March, HSBC’s Hong Kong unit and three of its traders were indicted by prosecutors. Credit Suisse, which was acquired by UBS Group, is also facing a fine, local Korean media reported in May. BLOOMBERG
