Illegal short selling 'considerable issue' for global investment banks, FSS Gov. says

Financial Supervisory Service Gov. Lee Bok-hyun speaks during a press conference on March 11 at the agency's headquarters in western Seoul. [YONHAP]

Recent instances of illegal short selling unearthed by financial authorities indicate “a considerable issue” in the management of global investment banks, Financial Supervisory Service (FSS) Gov. Lee Bok-hyun said Thursday.

“The findings suggest a considerable issue in management significant enough to shake the confidence that there was no compliance issue within institutional investors,” said Lee, addressing a question on whether the illegal practices the FSS had identified were severe enough to warrant a full-fledged investigation.

“As for whether [such illegal practices] were intentional or not, I believe it was a combination of both,” said the governor.

The comment came Monday during the governor’s meeting with foreign press in western Seoul, during which the FSS announced the interim results of its ongoing investigation into alleged illegal short selling by various investment banks. So far, the probe has revealed illegal short sales worth 211.2 billion won ($154 million).

According to the report, BNP Paribas, HSBC and seven other entities engaged in illegal short selling activities involving 164 stocks from May 2021 to December of last year. The FSS attributed the transgressions primarily to “a lack of understanding of the domestic rules, insufficient internal control systems and mistakes by traders.”

Naked short selling, illegal in Korea, is the practice of shorting stocks borrowing them first. Authorities banned short selling through June after finding that some global investment banks had made such illegal trades.

Regarding the potential extension of the current short selling ban, the governor mentioned that the financial watchdog is “considering many options” without providing a specific timeline.

“My personal opinion is that it would be preferable to provide a road map for technical and institutional improvement for the [short selling] system after gathering feedback before the end of June,” said Lee.

The governor stressed that “there is no objection that short selling should be allowed in the market in an appropriate form” but suggested that “we need to regain the trust that institutional, foreign and retail investors hold for the market by making necessary improvements.”

During the meeting, Lee also promised a prompt restructuring of the construction sector, saying that while a market shake-up will inevitably make some players unhappy, “soaring costs, including high raw material prices, have cut cash inflow into the real estate market for too long a period of time such that a restructuring is necessary for the market normalization.”

The FSS is set to announce its plan for restructuring regarding project financing loans in the real estate sector, which spurred concerns about a potential liquidity crunch.

The governor assured attendees that the current risk posed by such project financing loans “is manageable” despite lingering macroeconomic uncertainty.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]