The Financial Supervisory Service (FSS) has announced plans to conduct a comprehensive investigation aimed at eradicating the common practice of illegal short selling by global investment banks (IBs).
In its business plan announced on Feb. 5, the FSS stated, “We will crack down on market disruptions such as illegal short selling, unfair trading practices, and accounting irregularities. Simultaneously, we will commit to making institutional improvements to establish regulations for the capital market.”
Initially, the FSS has decided to conduct a comprehensive investigation into the illegal short selling practices of top global IBs in terms of domestic short selling transactions. The FSS also plans to scrutinize the entrusted processes of domestic securities firms that handle orders from global IBs and check for their awareness of illegal short selling practices. Additionally, it aims to promote equalization of trading conditions between institutional and individual investors in short selling and strengthen penalties to support improvements in the system. The implementation of a comprehensive electronic system for short selling transactions is also underway to eradicate illegal short selling practices.
The FSS has announced that it discovered violations of short selling regulations by two global IBs last month. It was revealed that they submitted naked short selling orders amounting to 54 billion won (US$40.43 million) for five different stocks. According to the FSS, these global IBs submitted sell orders based on excessively marked balances, where borrowed amounts were duplicated, or already lent shares were sold to another department, resulting in duplicated calculations of ownership and excessive marked balances for sell orders.
In addition, the FSS has decided to conduct a thorough investigation into various unfair trading practices, such as irregularities related to political theme stocks, improper transactions following new business announcements, and the spread of false information on social networking services (SNS). It also plans to enhance its response to unfair trading through the reinforcement of personnel and equipment, utilizing the Capital Market Special Law Enforcement Police. Furthermore, the FSS plans to establish measures related to internal controls in the duties of a listing agent, improve the criteria and procedures for determining initial public offering (IPO) prices, ensure sound entry into the fund market by private fund managers, and develop a plan for timely removal of unqualified asset management companies.
Lee Bok-hyun, the head of the FSS, stated, “Regarding short selling, we will collaborate with the Financial Services Commission to equalize trading conditions between institutions and individuals, working to normalize the tilted playing field. Through the establishment of an electronic system for short selling transactions and thorough investigations into global IBs, we aim to eradicate illegal short selling in the South Korean financial market.”