A BNP Paribas bank office in Paris, France / EPA-Yonhap
Financial authorities inspect other global investment banks for illicit practices
By Anna J. Park
BNP Paribas and HSBC have been hit hard with the largest fine ever imposed by Korea’s top financial regulator for repeating illegal short selling transactions, according to the Financial Services Commission (FSC), Monday.
The FSC said its Securities and Futures Commission, a decision-making body on matters of unfair trade practices in the securities and futures markets, decided Friday that the two Hong Kong-based companies had violated short selling regulations under Korea’s Capital Markets Act by engaging in naked short selling over an extended period of time.
The financial authorities imposed a fine totaling 26.5 billion won ($20.3 million) on the two companies over the violations, while filing a complaint with the prosecution. This is the largest fine ever imposed on financial institutions since the penalty system for short selling violations was introduced in April of 2021.
A logo of BNP Paribas is seen in Lille, northern France, in this undated photo. AFP-Yonhap
BNP Paribas’ Hong Kong branch was engaged in naked short selling by submitting shorting orders for 101 Korean stocks worth over 40 billion won from September 2021 to May 2022, without first borrowing those shares. Naked short selling is a trading practice that has been largely banned in major countries since the late 2000s. One of the shorted stocks by BNP Paribas included Korea’s big tech company Kakao.
Financial authorities explained that the company continued the practice, even though it was aware of the insufficient quantity available for selling shares.
“The Securities and Futures Commission concluded that the firm displayed clear intent by submitting short selling orders consistently, even when being fully aware of the insufficient quantity available for sale,” the FSC stated.
The financial regulator also viewed that a domestic securities company, which is an affiliate of BNP Paribas, also committed a serious violation of the Capital Markets Act because the firm went on to receive such naked short selling orders without taking any measures to figure out or prevent the repeated shortage of balances, even when it was aware of the possibility of naked short selling.
The logo of HSBC is seen at its headquarters in Hong Kong’s Central financial district. REUTERS-Yonhap
HSBC had placed naked short selling orders totaling 16 billion won for nine Korean stocks, including Hotel Shilla, from August to December 2021. The Securities and Futures Commission concluded that there was an intent to commit unlawful acts on the part of HSBC, given that the financial firm continued its practice of borrowing shares after submitting orders over a prolonged period, even though it knew that such short selling practices did not comply with Korean regulations.
“The commission has imposed the largest fine — since the introduction of the penalty system for short selling violations — on the two global financial companies, as it considers the firms’ violations as constituting a grave matter that harms the transactional order of capital markets as well as the trust of investors,” the FSC said.
The FSC said that it is also currently investigating short selling transactions of other global investment banks and entrusted securities companies.
In November, the FSC decided to ban short selling completely in the domestic stock markets until the end of next June, in response to the discovery of large-scale illegal short selling practices by the two global investment banks.
“During the period of short selling prohibition, the FSC plans to establish a computer system that can detect illegal short selling practices, aiming to alleviate retail investors’ concerns about illegal short selling,” FSC Vice Chairman Kim Soo-young said.