South Korea’s financial watchdog said it has so far uncovered 211.2 billion won (US$156 million) worth of illegal short trades by nine global investment banks, providing its latest formal update on a probe that began late last year.
The nine banks, whose names were not disclosed, violated mostly procedural rules while collectively shorting 164 stocks, a Financial Supervisory Service (FSS) briefing said. It is continuing to probe five other banks in the matter.
Two of the nine banks are already facing penalties imposed by the financial authorities and have been referred to prosecutors for further investigation for allegedly violating the nation’s capital markets law, FSS Senior Deputy Governor Hahm Yong-il told reporters on Friday. The watchdog plans to review penalties on the other seven banks.
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Activities of global banks and hedge funds have come under increased scrutiny in recent months in South Korea, as authorities boost steps to weed out naked short selling — a practice of selling shares without even borrowing them first. While short selling remains legal in many markets, it is a contentious political issue in the emerging Asian nation, with its powerful retail investors often blaming it for stock declines.
Describing the practice as “rampant,” authorities in November last year imposed a ban on all forms of short-selling until the end of next month, inviting criticism from some investors that the move would hurt the market’s appeal among global funds.
At the same time, a special team was formed to probe all short-selling activities by major global investment banks since May 2021 — when South Korea partially lifted a pandemic-era ban and allowed the resumption of short selling in stocks on the KOSPI 200 Index and the KOSDAQ 150 Index.
Most short-selling trades by global banks in South Korea are aimed at hedging their swap contracts with their end clients, the FSS said.
Europe-headquartered banks committed more breaches compared to those based in the US, and most trades under investigation were conducted from their Hong Kong offices, Hahm said. FSS officials plan to visit Hong Kong later this month to update global banks on South Korea’s regulations related to short-selling.
Overall, the 14 banks being probed by authorities accounted for 90 percent of short-selling trades by overseas firms in the country, the FSS said.
Regulators are also developing a platform to monitor short-selling that can help identify illegal transactions, it said.
The probe launch came after authorities in October last year accused two global banks of “routinely and intentionally” breaching short-selling rules in trades totaling 56 billion won. Then in December, BNP Paribas SA and HSBC Holdings PLC were fined by regulators for claims tied to short selling.
In March, HSBC’s Hong Kong unit and three of its traders were indicted by prosecutors. Credit Suisse Group AG, which was acquired by UBS Group AG, is also facing a fine, South Korean media reported earlier this month.
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