South Korea Levies Record Fines on Global Banks for Illegal Short Selling Practices

South Korea’s financial regulators have imposed a hefty fine of 26.5 billion won (approximately $20.4 million) on two prominent international banks, BNP Paribas SA, along with its domestic brokerage arm, and HSBC Holdings Plc, for their involvement in illegal naked short selling activities. This decision reflects the country’s intensified efforts to maintain market integrity and protect investor trust.

BNP Paribas faces a fine of 11 billion won, while its Korean brokerage unit is penalized 8 billion won. HSBC has been ordered to pay 7.5 billion won. The fines, announced by the Financial Services Commission (FSC), mark a record high in the country’s history of financial penalties. The specific details of the penalties were disclosed by a source close to the matter, who chose to remain anonymous.

The Securities and Futures Commission, operating under the FSC, described the violations as severe infringements that undermine market order and investor confidence. It was determined that the naked short-selling transactions conducted by these entities were not only prolonged but also intentional.

Further, the FSC plans to request a criminal investigation into these two international banks for their conduct. Both BNP Paribas and HSBC did not immediately respond to requests for comment.

In addition to this, South Korea’s efforts to clamp down on illegal short selling in the stock market have been ongoing. In a recent move, the FSC reimposed a blanket ban on all short selling until June 30, 2024, extending a temporary prohibition initially set during the Covid-19 outbreak. This ban covers stocks across all market indices, reflecting the country’s stringent approach towards market regulation.

Short selling, a strategy where investors borrow shares to sell them, hoping to buy them back at a lower price, has been a contentious issue in South Korea. The practice, particularly naked short selling, where shares are sold without first being borrowed, is viewed as harmful to market stability. South Korea’s renewed focus on curbing this practice aligns with its broader efforts to enhance market fairness and transparency, particularly in light of the upcoming legislative elections where retail investor interests are a significant consideration.

The imposition of these record fines and the extended short selling ban signify a critical moment for South Korea’s financial market. Institutional investors warn that these measures might reduce market liquidity and transparency, impacting South Korea’s standing in global financial markets. Nevertheless, the move is seen as a crucial step in the country’s ongoing efforts to establish a more regulated and investor-friendly market environment.