Naked shorting prevalent among foreigners

Financial Services Commission Chairman Eun Sung-soo, third from left, takes an oath by a witness before the National Assembly audit in Seoul, Friday. / Yonhap

Financial regulator has no plan to ban short selling

By Park Jae-hyuk

Goldman Sachs and other foreign investors were found to have committed most of the illegal short selling on the nation's stock market, an opposition lawmaker said ahead of the National Assembly audit of the Financial Services Commission (FSC), Friday.

According to FSC data given to Rep. Joo Ho-young of the Liberty Korea Party, 94 among 101 naked short selling practices uncovered after 2010 were conducted by foreign companies.

Short selling refers to the sale of borrowed shares in the hopes of making a profit from the price fall, by buying the shares back at a lower price.

Naked short selling, which refers to the practice of conducting short selling without actually borrowing the stocks first, is prohibited in Korea.

Given that financial companies can input the number of borrowed stocks into the system without prior approval from lenders, illegal short selling has been prevalent on the Seoul bourse, according to the lawmaker.

He also criticized the financial authorities for tolerating illegal short sellers.

The FSC data showed the regulator imposed fines on only 45 violations among the 101.

The penalties levied on foreign firms include the record-high 7.5 billion won ($6.2 million) fine slapped on Goldman Sachs International ― the U.S.-headquartered investment bank's London subsidiary ― in November 2018.

The financial regulator also fined Goldman Sachs India Investment ― another subsidiary based in Singapore ― 72 million won in February.

In May, six anonymous foreign financial companies faced fines for illegal short selling of Samsung Electronics, KT&G and Lotte Chilsung Beverage shares.

“The FSC has failed to make fundamental reforms in the system,” the lawmaker said. “It is more important to prevent crimes beforehand with tough penalties, rather than uncovering them after they have happened.”

The FSC said it has no plans to prohibit short selling, citing the practice's positive effects, such as enhancing stock market liquidity and driving down prices of overvalued stocks.

In response to the criticism, however, it vowed to tighten regulations on illegal short selling.

“We will come up with measures to toughen penalties on illegal short selling including naked shorting,” the FSC said in a report given to lawmakers ahead of the National Assembly audit. “We will also consider organizing a special taskforce to investigate illegal short selling.”

Meanwhile, FSC Chairman Eun Sung-soo said in the Assembly audit that the government will come up with measures by early November to prevent any recurrence of the recent derivative fiasco.

Eun, who attended his first audit as the top financial regulator, however, remained cautious about defining sales of derivative-linked fund (DLF) options as fraud, saying an investigation by the Financial Supervisory Services was underway.