FSS launches probe into global banks over illegal short selling

Korea’s financial watchdog will investigate global investment banks to discover any illegal short sale they may have committed in the country, said the Financial Supervisory Service (FSS) on Tuesday.

Financial Supervisory Service Gov. Lee Bok-hyun speaks during a parliamentary inspection held at the National Assembly in Yeouido, western Seoul, on Oct. 27. [NEWS1]

Korea’s financial watchdog will investigate global investment banks to discover any illegal short sale they may have committed in the country, said the Financial Supervisory Service (FSS) on Tuesday.

The FSS will investigate institutional investors that may have conducted illegal short selling, unlike past investigations where the financial watchdog focused on certain stocks that were illegally short sold. Short sales conducted since the practice was resumed in May 2021 will be probed.

The FSS will also look into domestic brokerage firms that helped transactions of global investment banks. It will examine the short sale process and whether the brokerage firms pushed ahead with the transactions despite having known about its illegality.

The announcement followed two weeks after the FSS said it discovered two global investment banks committed naked short selling, the practice of short selling a tradable asset without first borrowing the asset, in Korea.

The two firms, reported to be HSBC and BNP Paribas by local media outlets, short sold more than 50 billion won ($37 million) worth of stocks from 2021 through 2022. Kakao and Hotel Shilla are some of the stocks they shorted, according to the reports.

The FSS Gov. Lee Bok-hyun said during a parliamentary inspection last month that criminal punishment may be possible against the global investment banks, and pledged to impose the heaviest possible penalty following a review by the Financial Services Commission.

“It is a serious matter where major financial companies systematically violated domestic regulations,” said the FSS in a statement. The findings “confirmed the market was manipulated by an illegal short sale that had been proposed.”

The FSS will collaborate with foreign financial watchdogs, including from Hong Kong for its investigation on the short sale. The joint investigation will begin in the first quarter of next year.

A press conference will be held abroad, targeting foreign investors in the first half of next year.

The FSS will also form a special investigation team that consists of 20 people, including IT experts. The number of personnel has increased from the previous eight people in order to raise the efficiency of the investigation, according to the FSS.

Short selling has been noted 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 last month, calling for an improvement of the short selling system to raise stability and fairness of the securities market.

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.

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