[2023 National Audit] Lee Bok-hyun "Short Selling, Cause of Undervaluation in Korean Stock Market... Urgent Measures Needed"

"Must bear significant financial responsibility for criminal punishment to be possible"
"Short selling needs advancement but trust is greatly damaged"

Lee Bok-hyun, Governor of the Financial Supervisory Service (FSS), agreed on the need for institutional improvements, stating that short selling is a cause of the Korea discount (the undervaluation of the Korean stock market). Additionally, regarding the recently detected illegal short selling by global investment banks (IBs), he said, "If the perpetrators (who are foreigners or overseas corporations) are abroad, we will closely cooperate with investigative authorities to bring them here and ensure they face criminal punishment under domestic law."

On the morning of the 17th, Lee Bok-hyun, Governor of the Financial Supervisory Service, is responding to questions from lawmakers during the National Assembly's Political Affairs Committee audit of the Financial Supervisory Service held at the Financial Supervisory Service in Yeouido, Seoul.
[Photo by Yonhap News]

On the 17th, during the National Assembly’s National Policy Audit held at the FSS office in Yeouido, Seoul, Governor Lee responded to a question from Yoon Joo-kyung, a member of the People Power Party, saying, “The recently detected illegal short selling cases are too disruptive to the market to be seen as isolated incidents, so we need to consider this issue fundamentally,” and added, “Extraordinary measures are necessary, and a response at the level of a whole-of-government approach is required.”

The FSS recently announced that two major global investment banks based in Hong Kong were caught deliberately engaging in naked short selling worth 56 billion KRW in the domestic capital market. Although the FSS stated its intention to impose the largest fines, it is interpreted that the strong punishment stance was expressed in response to criticism that the sanctions were too lenient.

While agreeing on the need to improve the short selling system, Governor Lee emphasized that restoring trust is a priority. He pointed out, “To resolve the Korea discount, the financial market must be modernized, but short selling itself has become such a problem that it is a cause of the Korea discount. Therefore, we need to think about this issue more comprehensively and multidimensionally.”

Regarding demands from individual investors for improvements such as computerized short selling systems and repayment period restrictions for foreigners and institutions, Governor Lee said, “In terms of computerization, at the very least, domestic securities firms should be able to identify the lending status of foreign clients placing orders, and it seems appropriate to require such order placement. How to implement computerization needs to be considered within government authorities.”

On the necessity of repayment period restrictions for institutions and foreigners, he responded, “I agree with the intent,” and added, “There are various legislative examples, including a 180-day limit. Some proposals include imposing restrictions. We need to consider measures suitable for Korea’s circumstances.”

Earlier, on the 4th, a related petition was posted on the National Assembly’s public consent petition platform, and within eight days, on the 12th, it reached 50,000 signatures. The petition included demands for the introduction of a securities trading system to preemptively block naked and indefinite short selling, as well as repayment period restrictions for institutions and foreigners.

Regarding the timing of the resumption of short selling, he said, “With issues such as illegal short selling by prominent overseas financial institutions coming to light, government authorities are taking a cautious stance on the timing of resuming short selling, which could significantly increase market volatility amid uncertain economic and financial conditions,” and added, “The position remains unchanged that decisions should be made carefully while monitoring the situation this year and next.” He emphasized, “We cannot simply overlook short selling as it is, nor can we completely ban it; we are stuck in a bottleneck. We need to review the current situation with a more open mind and prepare improvement measures.”