The Financial Supervisory Service (FSS) has taken a proactive stance in a full-scale confrontation with short-selling forces, revealing that it has detected 33 cases of naked short selling this year and imposed fines and penalties amounting to 10.5 billion won (US$8.11 million). FSS Governor Lee Bok-hyun is planning to conclude an investigation into market makers and liquidity providers, who are exceptions to the comprehensive ban on short selling, and disclose the findings by the end of this month.
At a bipartisan meeting held in the National Assembly on Nov. 16, the FSS reported that it had investigated 62 cases of naked short selling this year and took measures, including fines and penalties, against 33 cases. The remaining 29 cases are currently under investigation and sanction procedures.
Among the 33 cases where actions were taken, excluding one case that was penalized with fines totaling 1.12 billion won before the introduction of penalties, the remaining 32 cases were subject to fines with a total of 9.38 billion won.
In particular, starting from March this year when two foreign financial investment companies were fined a total of 6.05 billion won, the FSS has been strictly enforcing sanctions with a zero tolerance policy towards violations related to uncovered short selling, as explained by the FSS.
Sanctions have also been announced regarding cases of malicious uncovered short selling that have been raised as suspicions in the market and illegal short selling practices by global investment banks (IBs).
The FSS is investigating cases where foreign hedge funds intentionally submitted sell orders from an uncovered position in order to lower block deal prices or maximize profits before disclosing block deal information. It is also scrutinizing instances where illegal short-selling practices, such as repeating borrowing after initial sales through margin trading, have been overlooked for an extended period due to mismanagement of margin trading transactions.
The measures for violations of uncovered short selling are increasing each year, with four individuals fined 730 million won in 2020, 14 individuals fined 800 million won in 2021, and 28 individuals fined 2.35 billion won last year, indicating a rising trend.
The FSS is currently conducting a comprehensive investigation into the transactions of the top global IBs in terms of short selling in the domestic market since the partial resumption of short selling in May 2021. Domestic securities firms that receive orders from global IBs are also not exempt from scrutiny.
The FSS is also examining whether these securities firms are fulfilling their obligations regarding the delegation of short-selling orders. It has decided to closely scrutinize the processes related to short selling order delegation as well as the ability to detect illegal short-selling orders.
Furthermore, during the investigation of illegal short selling, the FSS is checking for potential misuse of short selling, including the use of undisclosed critical information and market manipulation. Global IBs are subject to reduced penalties if they voluntarily report violations.
To this end, the FSS launched a “special investigation team on short selling” on Nov. 6 composed of a total of 20 members, including investigators with experience, individuals proficient in English, and information technology experts. An FSS official stated, “Investigations into some global IBs are already underway, confirming details such as suspected securities, periods, and violation specifics. We plan to conduct investigations into other IBs sequentially.”
In addition, the FSS is engaging in collaborative efforts with the Securities and Futures Commission (SFC) of Hong Kong, and it is proactively holding meetings with foreign IBs based in Hong Kong and Singapore to prevent potential issues.