FSS calls for better internal controls in short selling from Hong Kong banks

The financial regulator said that a senior official went to Hong Kong last week to meet with major investment banks to discuss Korea's short-selling system.

Financial Supervisory Service Senior Deputy Governor Hahm Yong-il speaks during a press briefing on the interim result of the ongoing investigation into global investment banks over illegal short selling in western Seoul on May 6. [YONHAP]

A senior official of the Financial Supervisory Service (FSS) requested that global investment banks based in Hong Kong strengthen their internal control systems to better comply with Korea's short-selling rules, as the financial regulator continues to investigate illegal short trades by major foreign investors. According to the FSS Monday, Senior Deputy Governor Hahm Yong-il visited Hong Kong in a two-day trip through last Friday.

The latest visit was to introduce the government’s latest efforts to fine-tune the stock short-selling system to foreign institutional investors, while also seeking bigger collaboration in the ongoing probe into illegal short trades following the FSS's recent revelation of additional illegal short trades by global investment banks.

On Thursday, Hahm met with representatives from seven global investment banks, as well as the Asia Securities Industry and Financial Markets Association and Pan Asia Securities Lending Association.

During the meeting, the senior deputy governor introduced the Korean authorities’ plan to establish a new monitoring system to detect illegal short selling and requested active participation by the banks in the financial regulator's ongoing probe of illegal shorting.

The FSS announced in May that it uncovered additional illegal short selling cases by foreign investors, which brought the total amount of involved assets to 211.2 billion won ($155.5 million). The investigation began last November to scrutinize the trades of 14 global investment banks operating in Korea, with the list of violators whittled down to nine so far.

The executives of the global firms requested that the authorities address regulatory uncertainties regarding the short-selling system with a clear guideline, according to the FSS.

Hahm also met with Hong Kong’s Securities and Futures Commission CEO, Julia Leung Fung-yee, on Friday to discuss measures to strengthen joint efforts in financial regulations.

The financial authorities will “promptly push forward with the ongoing initiatives to implement a computerized [monitoring] system and enhance relevant regulations in order to restore investor trust in the Korean capital market,” said the FSS in a release.

Naked short selling, illegal in Korea, is the practice of shorting stocks without borrowing them first. The financial authorities banned short selling in November last year after finding that some global investment banks had made such illegal trades, and are currently developing a monitoring system designed to detect the illicit transactions.

The temporary ban was initially announced to last until June, but whether it will be lifted as planned is yet to be decided.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]