Banks illegally shorted $156 million of stocks: South Korea probe

By Youkyung Lee

South Korea’s financial watchdog -- Financial Supervisory Service (FSS) -- said it has so far uncovered $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, according to a briefing given by the FSS. 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, Hahm Yong-il, senior deputy governor at the FSS, told reporters. The watchdog plans to review penalties on the other seven banks.

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.

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 Korea’s regulations related to short-selling.

“So far, most naked short-selling trades by nine banks were related to the management of the stock balance, such as an insufficient number of borrowed shares,” he said.

Most of the violations were not related to the use of undisclosed information or other kinds of unfair trading practices that are subject to criminal enforcement.

Overall, the 14 banks being probed by authorities accounted for 90% of short-selling trades by overseas firms in the country, according to the FSS.

Describing the practice as “rampant,” authorities in November imposed a ban on all forms of short-selling until the end of June 2024, inviting criticism from some investors that the move will 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 Korea are aimed at hedging their swap contracts with their end-clients, the FSS said.

Regulators are also developing a platform to monitor short-selling that can help identify illegal transactions. While the ban imposed in November is slated to remain until the end of June, President Yoon Suk Yeol has recently said restrictions will remain in place until an electronic monitoring system is in place.

The probe launch came after authorities accused in October two global banks of “routinely and intentionally” breaching short-selling rules in trades totaling 56 billion won. In December, BNP Paribas SA and HSBC Holdings Plc were fined by regulators for claims tied to short selling.

In March this year, HSBC’s Hong Kong unit and three of its traders were indicted by prosecutors. Credit Suisse, which was acquired by UBS Group AG, is also facing a fine, local Korean media reported earlier this month..