'HSBC·BNP Paribas' Caught for 56 Billion Won Illegal Short Selling... Long-term and Deliberate

First Detection of Habitual Naked Short Selling by Global IB... Maximum Fine Expected
Kim Jeong-tae, Deputy Governor of FSC, "Inspection of Domestic Securities Firms to Be Strengthened"

BNP Paribas and HSBC Global IB (investment banks) were recently caught conducting illegal short selling worth a combined 56 billion KRW in the domestic stock market. This is the first time that the habitual illegal short selling practices of global IBs have been exposed. Naked short selling, which involves selling stocks without borrowing them, is prohibited in the domestic market. Given the long-term nature of the illegal short selling behavior uncovered, the largest fine since the introduction of the penalty system is expected. The Financial Supervisory Service (FSS) plans to strengthen inspections of illegal short selling targeting major global IBs and domestic securities firms that receive short selling orders from them. Investigations into illegal short selling by other global IBs will also be expanded.

A Company's Non-Borrowed Short Selling Method

The Financial Supervisory Service announced on the 15th that two global IBs based in Hong Kong were found to have continuously engaged in illegal short selling by selling stocks they did not own and borrowing them afterward. Both cases involve long-term illegal short selling by global IBs providing Prime Brokerage Services (PBS), which offer comprehensive financial investment services such as securities lending, borrowing, brokerage, credit extension, and over-the-counter derivatives contracts to clients. Previously detected illegal short selling cases were mostly due to hedge funds' order mistakes or errors.

BNP Paribas Hong Kong branch submitted naked short selling orders worth approximately 40 billion KRW on 101 stocks, including Kakao, from September 2021 to May 2022. The IB provides domestic stock investment services such as short selling to overseas institutional investors and submits short selling orders to the market to hedge when entering into sell swap transactions with institutional investors. In this process, Company A submitted short selling orders based on double-counting of owned stocks across departments.

For example, if Department A within BNP Paribas holds 100 shares and lends 50 shares to Department B, Department A does not record the lending and recognizes 100 shares as its balance. Simultaneously, Department B also recognizes the 50 lent shares as its balance, causing BNP Paribas as a whole to recognize 150 shares?50 more than the actual amount?as its balance.

BNP Paribas realized the shortage of settlement quantity the day after the trading but still neglected the illegal act by borrowing afterward. It was also revealed that a domestic custodian securities firm affiliated with BNP Paribas continued to accept naked short selling orders despite repeatedly knowing about the shortage of balances without investigating the cause or taking preventive measures.

HSBC Hong Kong branch also submitted naked short selling orders worth approximately 16 billion KRW on nine stocks, including Hotel Shilla, from August to December 2021. HSBC received sell swap orders from overseas institutional investors and entered into contracts based on the number of shares that could be borrowed in the future rather than the number of shares confirmed to be borrowed in advance, then submitted short selling orders.

Kim Jeong-tae, Deputy Director of the FSS, explained, "It is hard to believe that global IBs continued these illegal short selling practices due to a lack of understanding of our country's system," adding, "Given the long-term naked short selling, it is recognized as intentional illegal short selling."

B Company's Non-Borrowed Short Selling Method

However, the FSS believes that these entities did not short sell before the disclosure of adverse information, and the impact of their illegal short selling on the stock market at the time was likely minimal. Lee Seung-woo, Director of the Investigation Division 2, explained, "The short selling proportion of individual stocks itself was not large, and there were many cases where they incurred losses during the process of short selling and subsequent liquidation," adding, "It is difficult to definitively conclude that they influenced the stock price decline." He further stated, "Since IBs only act as intermediaries, profits and losses from price fluctuations belong to the final investors," and "It is presumed that they neglected illegal processes for commission income."

The FSS expects the largest fine since the introduction of the penalty system to be imposed due to this illegal short selling detection. The previous largest fine was 3.87 billion KRW imposed on foreign financial investment companies in March this year.

Meanwhile, the FSS plans to expand investigations targeting major global IBs similar to those caught this time. In some IBs, signs of violating the Capital Markets Act over a long period were found, such as selling more shares than held before market opening, and investigations are underway. The FSS also plans to immediately start investigations upon detecting suspicious transactions in other IBs. If necessary, they will cooperate with overseas regulatory authorities. Recently, they actively conducted international cooperation, including confirming the source of funds and exchanging information with the Hong Kong Securities and Futures Commission (SFC).

The FSS also plans to strengthen inspections of domestic securities firms that receive orders from global IBs. Since domestic securities firms may overlook the principal's illegal acts due to affiliate relationships and commission income interests, the FSS will check the short selling order acceptance process and the ability to detect illegal short selling orders. The FSS emphasized, "We will take all measures, including close cooperation with overseas regulatory authorities if necessary, to strictly punish illegal short selling by foreign financial investment companies and establish order in the domestic capital market."

The FSS short selling investigation team imposed fines and penalties totaling 10.49 billion KRW on 30 cases (21 foreigners) of naked short selling from the beginning of this year through September.

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