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South Korea’s financial watchdog is pursuing the imposition of unprecedented fines on two international investment banks for their alleged “routine and intentional” involvement in naked short-selling, a practice prohibited in the country. The Financial Supervisory Service (FSS) disclosed that the Hong Kong-based units of these banks engaged in naked short sales of multiple securities between 2021 and 2022, potentially reaping illicit profits. While the banks’ identities remain undisclosed, the FSS intends to reveal them as the regulatory process proceeds.

Naked short-selling, an illicit technique that entails selling shares without borrowing them first, has raised serious concerns. The Financial Services Commission (FSC), South Korea’s financial regulator, is set to finalize the proposed fines through a committee. This marks the first time that such violations have been detected at global banks participating in Korean transactions.

Kim Jungtae, Deputy Governor at the FSS, expressed the gravity of the situation, stating, “This is a serious problem. For a long time, they have continued to do naked short-selling while they were aware that the practice is illegal in South Korea.”

The impending penalties signal South Korea’s persistent efforts to eliminate illegal short-sellers from its $1.7 trillion stock market. Such trading practices have a negative public image in the nation, prompting occasional protests by local retail traders and coordinated efforts to drive up stocks targeted by short sellers.

The FSS revealed that one of the two brokerages engaged in the illegal shorting of 101 stocks, with transactions amounting to 40 billion won ($29.6 million) between September 2021 and May 2022. The other bank pursued a similar path with nine stocks, totaling 16 billion won, during the August-December 2021 period while hedging its swap contracts with overseas funds. The watchdog, which investigated these cases over a nine-month period, believes that both institutions could have gained extra profits from these naked short sales.

The FSS has plans to broaden its investigation into other global investment banks and is seeking collaboration with its counterpart in Hong Kong.

The specific metrics behind calculating the fines have not been disclosed, but officials confirmed that they are set to be the highest on record, considering the scale of the naked short-selling orders. The existing record fine is 3.9 billion won ($2.9 million), imposed on Erste Asset Management earlier this year.

South Korea has not fully lifted its temporary, pandemic-era ban on stock short-selling, limiting it primarily to the Kospi 200 Index and the Kosdaq 150 gauge out of the over 2,000 publicly traded companies in the country.

Photo Source: Binance Square

October 15, 2023
By Delino Gayweh
Serrari Financial Analyst

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