Financial Supervisory Service Holds Meeting to Prevent Illegal Short Selling by Foreign Securities Firms... Many Foreigners Among Violators

Financial Supervisory Service, Yeouido, Seoul. Photo by Jinhyung Kang aymsdream@

The Financial Supervisory Service (FSS) held a meeting on the 7th with compliance officers from foreign securities firms to prevent illegal short selling. Since most of those caught for illegal short selling are foreigners, the FSS requested foreign short selling investors to participate in trading with sufficient internal control systems in place.

According to the FSS on this day, the number of illegal short selling cases detected has been increasing every year. The number of violators rose from 4 in 2020 to 14 in 2021, and increased to 28 last year. This year, 24 violators have already been caught by July. Major violation cases include Company A, which knowingly conducted naked short selling to maximize trading profits using negative information without holding the stocks. Company B was caught conducting naked short selling after mistakenly recognizing new shares to be received through a free capital increase as available for sale by pre-registering them in its own system for fund evaluation, resulting in a fine of 3.87 billion KRW. The amount of fines and penalties also rose from 730 million KRW in 2020 to 800 million KRW the following year, and reached 2.35 billion KRW last year. This year, it soared to approximately 9.81 billion KRW by July.

Among the violators, foreigners accounted for an overwhelming majority. All 4 and 14 violators detected in 2020 and 2021 respectively were foreigners, and in 2022, 25 out of 28 violators were foreigners. This year, 16 out of 24 violators caught by July were foreigners.

On this day, the FSS urged foreign and other short selling investors to be cautious, stating, "Responsibility for short selling violations cannot be avoided on the grounds of operational errors or lack of understanding of the domestic securities market."

Additionally, securities firms entrusted with short selling orders were guided to inspect their internal control systems. They were also instructed to educate customers about the short selling system and to play an active role in preventing illegal short selling. The FSS plans to strictly inspect the appropriateness of securities firms’ short selling order acceptance and processing during future investigations and examinations.

The securities industry commented, "Compliance officers at foreign securities firms fully understand the importance of their role in preventing illegal short selling," and added, "There was strong agreement on the need to restore market participants’ trust through active self-regulatory efforts such as strengthening internal controls to eradicate repeated illegal acts like naked short selling."

They also noted, "There was a shared recognition of the need to improve foreign investors’ understanding of international trading practices and regulatory differences that could cause short selling violations."

Kim Jeong-tae, Deputy Director of the Disclosure and Investigation Division at the FSS, said in his opening remarks, "We are well aware of the various controversies surrounding the necessity and market impact of short selling, and the financial supervisory authorities are also carefully considering the resumption of short selling," adding, "However, before discussing whether to resume short selling, illegal short selling must first be eradicated in the market, and efforts to improve investors’ perception of short selling should precede."

He emphasized, "It should be especially noted that strengthening internal controls among market participants is the most efficient solution to prevent illegal short selling," and stressed, "Efforts to prevent short selling violations, such as improving the short selling order process, enhancing internal control systems, and educating related employees, are urgently needed."

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