Korean regulators now impose billions in fines for illegal trading, particularly when ‘naked short selling’, increasing fees upwards of 5,000%.
The Financial Supervisory Service (FSS) of South Korea is ramping up its enforcement against short sale violations, shifting from treating these breaches as minor infractions subject to low fines to imposing substantial penalties based on the scale of the violations.
This change follows amendments to the Financial Investment Services and Capital Markets Act (FSCMA), which allow penalties to be calculated based on the volume of short sale orders, significantly increasing potential fines.
In March 2023, the Securities and Futures Commission (SFC), part of the FSS, applied this new penalty calculation for the first time, imposing fines on two institutional investors for engaging in illegal short sales.
One case involved an investor mistakenly placing sell orders for shares that were not yet available, leading to a naked short sale.
The other involved an error in inventory management, resulting in a similar breach.
The fines totaled KRW 3.87 billion and KRW 2.18 billion, respectively.
Recent enforcement actions highlight the regulators’ commitment to addressing short sale violations.
In December 2023, the SFC levied penalties of KRW 11.44 billion against a French financial group’s affiliate and additional fines against its Korean affiliate and a UK-based group.
By July 2024, the SFC imposed record fines of KRW 16.94 billion and KRW 10.23 billion on two Swiss-based financial group affiliates.
As investigations into global investment banks continue, it remains unclear whether even larger penalties will follow.
While the SFC has imposed significant fines, a recent court ruling overturned one of its penalties against a European broker for a naked short sale, deeming the fine excessive.
This case involved the broker mistakenly executing sell orders for the wrong fund, leading to a court challenge of the SFC’s authority in imposing such fines.
In a notable escalation, the SFC made a criminal referral in December 2023 for two global investment banks accused of failing to properly document their lending transactions, resulting in prolonged naked short sales.
This marked a significant shift as it was the first time Korean regulators sought criminal liabilities for short sale breaches.
In March 2024, the prosecutor’s office indicted one of the banks and its employees for violating laws against naked short sales.
As Korean regulators continue to maintain strict oversight on illegal short sale activities, it remains to be seen whether they will pursue criminal investigations into other market participants exhibiting similar patterns of behavior.
Interestingly, despite imposing more record fines in July 2024, the SFC chose not to refer any cases for criminal prosecution, highlighting the complexities of regulatory enforcement in this area, per IFLR.
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Also Read: South Korea Now Finds Banks Pursued Illegal Shorting Scheme
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