HSBC, BNP Paribas may face criminal charges over short selling

BNP Paribas and HSBC may face criminal charges in Korea for the naked short selling they allegedly conducted in the country as FSS seeks to impose the heaviest penalty possible.

Financial Supervisory Service (FSS) Gov. Lee Bok-hyun speaks during a parliamentary inspection held at the FSS office in Yeouido, western Seoul, on Tuesday. [NEWS1]

HSBC and BNP Paribas may face criminal charges in Korea for the naked short selling they allegedly conducted in the country as FSS seeks to impose the heaviest penalty possible.

“Criminal punishment seems possible,” said Financial Supervisory Service (FSS) Gov. Lee Bok-hyun during a parliamentary inspection held at its office in Yeouido, western Seoul. The FSS "will be able to pull in [employees] from abroad for punishment.”

Hong Kong-based units of two global investment banks conducted naked short selling in securities between 2021 and 2022 and could have reaped extra profits from them, the FSS announced last week without naming the banks. Local media reports claim HSBC and BNP Paribas are the two firms.

Naked short selling, the practice of short selling a tradable asset without first borrowing the asset, is illegal in Korea.

One of the investment banks shorted some 40 billion won ($29.6 million) against 101 stocks while the other bank shorted roughly 16 billion won against nine stocks.

Kakao and Hotel Shilla are some of the stocks they shorted, according to local media reports.

The FSS said it will impose the heaviest possible penalty following a review by the Financial Services Commission (FSC).

The largest ever penalty issued by the FSC for illegal short selling was 3.87 billion won imposed on an undisclosed financial company in March.

“Illegal short selling cases need to be tackled on a fundamental level since their [impacts] are too big, like causing market turbulence,” Lee said.

He noted that it is one of the factors that contributes to the notion of the “Korea discount,” which is a tendency for Korea companies to have lower valuations than global peers due to factors like weak corporate governance.

“We need to gain trust from market participants such as domestic institutional and retail investors. We have reached a point where trust has been largely damaged, so I believe we need special measures,” Lee added.

Short selling has been pointed by retail investors as one of the key reasons for the weak stock market.

More than 50,000 people signed a petition on the website of the National Assembly from Oct. 4 through Oct. 12, calling for an improvement of the short selling system to raise stability and fairness of the securities market.

The petition has been submitted to the parliamentary national policy committee for review.

The petitioners said securities systems should fundamentally make it impossible to borrow stocks and also demanded the regulators limit the redemption period for the stocks shorted by institutional and foreign investors.

Currently, there is not a time limit on when they redeem the stocks, which makes it impossible for them to incur a loss if they wait until stock prices fall, according to the petitioners.

BY JIN MIN-JI [jin.minji@joongang.co.kr]