November 28, 2023

Investment Banking

Let Your Investment Banking Do The Walking

South Korea Plans to Fine Two Global Investment Banks for Naked Short Selling

(Bloomberg) — South Korea’s financial watchdog is proposing the imposition of record fines on two global investment banks for “routinely and intentionally” engaging in naked short-selling, which is considered illegal in the nation.

The Hong Kong-based units of the two banks conducted naked short sales in several securities between 2021 and 2022, and could have reaped extra profits from them, the Financial Supervisory Service said in a statement on Sunday, without naming them. 

BNP Paribas SA and HSBC Holdings Plc are the two banks, local media including the Korea Economic Daily reported. A BNP spokesman declined to comment, while an HSBC spokesman didn’t immediately provide a response. Naked short-selling is a practice that involves selling shares without even borrowing them first.

The proposed fines need to be finalized by a committee at the nation’s financial regulator Financial Services Commission, the FSS said, adding that the banks’ identities will be disclosed to the public after future proceedings. While authorities have uncovered and penalized money managers for illegal short-selling in the past, it’s the first time such violations have been found at global banks engaged in transactions in Korea, the FSS said.

“This is a serious problem,” Kim Jungtae, deputy governor at the FSS, told reporters. “For a long time, they have continued to do naked short-selling while they were aware that the practice is illegal in South Korea.”

An imposition of penalties will mark an extension of South Korea’s increased efforts in recent years to weed out illegal short-sellers from its $1.7 trillion stock market. Public perception of such trading practices in the Asian nation remains deeply negative. Local retail traders have staged protests against these activities from time to time and also made sporadic coordinated attempts to drive gains in stocks targeted by short sellers.

READ: Hedge Funds Beware: Naked Shorts Can Land You Jail Term in Korea

One of the two brokerages illegally shorted 101 stocks with transactions totaling 40 billion won ($29.6 million) between September 2021 and May 2022, according to the FSS. The other did the same with nine stocks for 16 billion won during the August-December 2021 period while hedging its swap contracts with overseas funds.

Both firms could have reaped extra profits from such naked shorts, according to the FSS team that investigated the cases for as long as nine months. The watchdog said it plans to expand its investigation into other global investment banks and seek cooperation from its counterpart in Hong Kong.

Officials declined to share the metrics behind calculating the fines but said they are set to be the highest on record, given the size of the naked short selling orders. The current record is a 3.9 billion won ($2.9 million) fine imposed on Erste Asset Management earlier this year.  

South Korea is yet to fully lift a wider, pandemic-era ban on stock short-selling, which officials said was a temporary measure. After a partial easing move in 2021, out of the more than 2,000 publicly traded companies in the country, only members of the Kospi 200 Index and the Kosdaq 150 gauge are eligible for shorting.

(Updates with details from local media reports)

©2023 Bloomberg L.P.