Regarding recent discoveries of illegal short selling involving global investment banks, Lee Bok-hyun, the head of the Financial Supervisory Service (FSS), stated on Oct. 17, “We will hold them financially responsible for a much larger amount than in the past. Criminal punishment also seems possible, and we will ensure that employees abroad can be brought to justice.”
During the National Assembly’s parliamentary audit of the FSS held at the FSS building in Yeouido, Seoul, on the same day, Lee responded to a comment from Yoon Joo-kyung, a member of the ruling People Power Party, who pointed out, “There is a high level of public interest and anger regarding illegal short selling.”
He went on to say, “In a way, it may be considered that the fact that such large securities firms were able to engage in illegal short selling for such a long time implies that it has become customary in that industry despite being unlawful,” and added, “Short selling cannot be covered up or ignored. It is somewhat constrained, and, in a way, it may be seen as being trapped in a bottleneck, so there is a need to examine the current situation with an open mind and come up with solutions.”
Lee also emphasized the necessity of a short-selling computer system for preventing illegal short selling. He stated, “Considering that illegal short selling cases have the potential for market disruption beyond individual cases, we need to reflect on it fundamentally. Short selling itself acts as a ‘Korea discount,’ which refers devaluation of the domestic stock market, so there is a personal belief that we need to look at it from a balanced perspective with other policies on a zero-based approach.”
Lee continued, “In my personal opinion, computerization should be based on the assumption that at the very least, securities firms among the exchange member firms should grasp the collateral status of foreign and domestic customers placing such orders before accepting their orders. We need to consider how computerization could be implemented.”
Regarding the suggestion to impose restrictions on the short selling buy-in period for foreigners and institutions, he stated, “Taiwan also has legislation that sets a buy-in period for margin trading. However, there is a need for careful consideration when it comes to anything that could damage the trust of foreign investors. So, it’s difficult to provide a straightforward answer, but it is important to bring the issue to public discussion and further examination. As things stand, we are in a situation where we cannot unwind or control short selling. Therefore, we need to take an open-minded approach to review the situation and come up with solutions.”
Lee responded to a question from Representative Yoon, expressing his agreement with the intention that there should be a certain time limit on the borrowing period for short selling to prevent foreigners from placing borrowed short selling orders and waiting indefinitely until the stock price drops.
Lee commented on the criticism that the domestic short selling system is disadvantageous for individual investors compared to foreign investors and institutions. He expressed agreement, saying, “I have no disagreements regarding the need for the advancement of our regulations to gain the trust of foreign investors or improve our system for international credibility. However, it is also important to gain the trust of domestic institutions and all market participants. I believe that at this point, where trust has been significantly damaged, some extraordinary measures are required, and this is my personal view.”