Hantoo Securities Short Selling Controversy Spreads... Financial Authorities Hold Emergency Meeting Today to Prepare Comprehensive Measures

[Asia Economy Reporter Ji Yeon-jin] The short-selling violation case involving Korea Investment & Securities, a subsidiary of Korea Financial Group (refer to our July 26, 2022, page 17 report), is rapidly spreading. As it was belatedly revealed that Korea Investment & Securities was fined 1 billion KRW, the largest penalty ever imposed on a domestic securities firm for short-selling violations, criticism from individual investors has intensified, prompting the government to prepare comprehensive measures regarding the short-selling system.

According to financial authorities on the 28th, the Capital Market Bureau of the Financial Services Commission, the Financial Supervisory Service, and the Korea Exchange will hold a meeting to devise comprehensive measures related to short-selling. A Financial Services Commission official stated, "A comprehensive plan may come out after today's meeting, but we need to see the results of the meeting."

On February 23, Korea Investment & Securities was fined 1 billion KRW by the Securities and Futures Commission for violating Article 180, Paragraph 1 of the Capital Market Act, which contains regulations restricting short-selling. This fine is the largest since Goldman Sachs International was fined 7.548 billion KRW in 2018 for naked short-selling, and it is the largest scale among domestic securities firms. According to data received by Lee Jung-moon, a member of the Democratic Party of Korea, from the Financial Supervisory Service, domestic institutional investors have been fined a total of 1.2 billion KRW for short-selling violations over the past 12 years.

The Korea Federation of Investment Associations requested information disclosure from the Financial Supervisory Service and received short-selling data. Korea Investment & Securities sold approximately 140 million shares of about 900 companies without marking them as short sales for about 3 years and 3 months starting from February 2017. Article 208 of the Enforcement Decree of the Capital Market Act stipulates that investors who entrust the sale of securities must notify the brokerage firm whether the sale is a short sale, but this was violated. The largest volume of shares traded as regular sales despite being short sales was Samsung Electronics with 25.52 million shares, followed by SK Hynix (3.85 million shares), and Mirae Asset Securities (2.98 million shares).

The Financial Supervisory Service has been disclosing sanctions imposed on financial institutions and their executives on its website for five years since 2002 to enhance the effectiveness of disciplinary actions. However, the details of Korea Investment & Securities' recent short-selling violation and sanctions were not disclosed.

There have been many demands, especially from individual investors, to ban short-selling, which is seen as driving stock price declines. Criticism that the short-selling system favors foreigners and institutional investors has also been significant. The Financial Services Commission completely banned short-selling in March 2020 during the COVID-19 market crash and has allowed short-selling only for KOSPI 200 and KOSDAQ 150 stocks since April last year. During this period, considerable improvements were made to the system, including mandatory record-keeping of borrowing transactions for institutional investors' short-selling and extending the short-selling period for individual investors to 90 days as of April last year.

The national task implementation plan for the capital market sector announced on the 26th also included measures such as adjusting short-selling collateral ratios and expanding the designation system for overheated short-selling stocks. The government announced it would prepare such measures by the third quarter of this year and held a meeting for comprehensive measures just two days later.

This content was produced with the assistance of AI translation services.