Checking Compliance with Short-Selling Order Custody Obligations of Domestic Securities Firms
Investigating Abnormal Short-Selling Transactions by Market Makers and Liquidity Providers
The Financial Supervisory Service (FSS) will conduct a comprehensive investigation into short-selling transactions by top global investment banks (IBs) operating in South Korea since the partial resumption of short-selling (from May 2021). The investigation paradigm will shift from a stock-centered approach to an institution (investor)-centered approach, focusing intensively on short-selling transactions.
Lee Bok-hyun, Governor of the Financial Supervisory Service, is speaking at the Min-Dang-Jeong Council held at the National Assembly on the 16th to discuss directions for improving the short-selling system to restore investor confidence. Photo by Hyunmin Kim kimhyun81@
On the 16th, Lee Bok-hyun, Governor of the Financial Supervisory Service, stated at the Min-Dang-Jeong Council held at the National Assembly in Yeouido, Seoul, "This short-selling ban is not a temporary emergency measure but an unavoidable policy decision to perform a surgical operation," adding, "It is necessary to use this opportunity to level the playing field and establish a proper short-selling system that can protect individual investors." He continued, "The FSS has uncovered illegal short-selling by global IBs, confirming that some market suspicions are true," emphasizing, "We have launched a Special Short-Selling Investigation Team to conduct a full-scale investigation and will strictly deal with any illegal activities."
He also announced related inspections, saying, "While short-selling by market makers and liquidity providers, which some have raised suspicions about, is inevitable for investor protection, we will carefully examine whether there are any abnormal transactions through thorough inspections."
The FSS will investigate not only global IBs but also domestic custodian securities firms. It will check whether domestic securities companies that receive orders from global IBs fulfill their obligations in handling short-selling orders. The FSS stated, "We plan to focus on the short-selling order handling process and whether it is possible to detect illegal short-selling orders." Additionally, during the investigation of illegal short-selling, the FSS will closely examine the potential misuse of material non-public information and market manipulation related to short-selling. Currently, sanction procedures are underway for malicious naked short-selling using block deal information.
The FSS also shared plans to inspect market makers and liquidity providers. It is conducting inspections to verify the legality of business procedures and the appropriateness of exceptionally permitted short-selling, and plans to strengthen monitoring. The FSS said, "We will enhance monitoring together with related institutions such as the stock exchange, focusing on stocks with a high proportion of short-selling by market makers and liquidity providers, and will promptly investigate if any abnormal signs are detected."
International investigations and preventive activities will also be strengthened. For example, effective international investigations will be conducted in cooperation with foreign supervisory authorities such as the Hong Kong Securities and Futures Commission (SFC). Furthermore, preventive efforts will continue through meetings with foreign IBs located overseas (e.g., Hong Kong, Singapore) to inform them about relevant domestic laws and short-selling regulations.
Meanwhile, on the 6th, the FSS expanded and reorganized the 'Short-Selling Investigation Team' into the 'Special Short-Selling Investigation Team' to eradicate illegal short-selling. The FSS is continuously enhancing investigative capabilities by improving investigation techniques related to illegal short-selling and expanding dedicated investigative personnel. Currently, the Special Short-Selling Investigation Team consists of 20 members, including experienced investigators within the FSS, English-proficient personnel, and IT experts. This year, 62 cases of naked short-selling have been investigated, with 33 cases completed and the remaining 29 cases undergoing investigation and sanction procedures. The 33 cases resulted in fines totaling KRW 9.38 billion (32 cases) and penalties of KRW 1.12 billion (1 case). The FSS explained, "Starting with imposing fines totaling KRW 6.05 billion on two foreign financial investment companies (March 2023), we are strictly sanctioning short-selling violations with a zero-tolerance policy."
Additionally, the FSS plans to take stern action against malicious naked short-selling cases and habitual illegal short-selling practices by global IBs, which have been suspected in the market until now. The FSS stated, "Investigations into some global IBs are already underway to verify the suspected stocks, periods, and violations, and investigations into other IBs will proceed sequentially."
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