South Korea now fines Barclays and Citi for naked short selling, with authorities stating they are considering record-high fines for the violations.
South Korea’s financial regulators are contemplating significant fines for Barclays plc and Citigroup Inc. due to their alleged illegal short-selling activities, which could result in the highest penalties of this kind in the country’s history.
According to sources within the Korean financial authorities, a recent investigation by the Financial Supervisory Service (FSS) revealed that both banks engaged in naked short-selling of Korean stocks.
While short-selling is a legitimate trading strategy in South Korea, naked short-selling—selling shares without first borrowing them or confirming that they can be borrowed—is prohibited under the Capital Markets Act.
A committee within the Financial Services Commission (FSC) is currently reviewing the FSS’s findings.
An official indicated that they are considering imposing a fine of up to 70 billion won (approximately $50 million) on Barclays and a maximum of 20 billion won on Citigroup.
The final decision will be made by the FSC following this review.
If Barclays is fined 70 billion won, it would set a record for fines related to illegal short-selling in Korea.
Last year, fines for 35 short-selling violations totaled 37.1 billion won, with the previous highest fine being 27.17 billion won imposed on two subsidiaries of the former Credit Suisse Group.
Since the government increased penalties for such violations in 2021, fines for short-selling infractions have risen.
Authorities are now able to impose fines equal to 100% of the profits gained from these violations.
However, it remains uncertain whether they will impose such steep fines on Barclays and Citigroup before short-selling resumes in Korea in March 2025.
A market-wide ban on stock short-selling was implemented in November 2023, which has been extended through the first quarter of 2025. FSC Vice Chairman Kim So-young confirmed that short-selling is set to resume on March 31.
The ban on legitimate short-selling has been viewed as a barrier to foreign investment in Korean stocks.
In June, MSCI downgraded Korea’s short-selling accessibility in its annual review, which could hinder its inclusion in MSCI’s developed-markets index.
Multinational banks have strongly protested against fines for short-selling violations.
For instance, BNP Paribas has filed a lawsuit to overturn its fine, claiming that its naked short-selling was neither intentional nor profitable.
In December, the FSC fined BNP Paribas, its Korean brokerage, and HSBC Holdings a total of 26.52 billion won for naked short-selling activities.
The Korean financial regulator maintains that banks must be held accountable for their negligence in managing these prohibited trades.
Korean financial authorities assert that the Capital Markets Act allows traders to short only shares they have borrowed, rendering naked short-selling illegal regardless of the outcomes of the transactions.
However, Korea’s judiciary has ruled that only shares sold without prior borrowing are subject to fines.
For example, if an investment bank places a market order to short 10 billion won worth of shares without borrowing them, but only sells and repurchases 1 billion won worth, the fine would only apply to that final 1 billion won transaction.
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