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| Financial Services Commission (FSC) Chairman Choi Jong-ku / Courtesy of FSC |
By Park Hyong-ki
The Financial Services Commission (FSC) announced Tuesday that it will impose steeper penalties on any investors caught short-selling stocks without borrowing them first ― a procedure known as naked short-selling.
The regulator's move is in tandem with its ongoing investigation into Goldman Sachs for engaging in the practice, and increasing complaints from retail investors over such illicit trading.
FSC Chairman Choi Jong-ku reiterated to reporters that naked short-selling was illegal here, and the financial authorities and lawmakers have agreed to introduce a law revision that will specify stronger punishment of perpetrators.
"Should we uncover that Goldman Sachs has indeed engaged in naked short-selling, the authorities will impose the strongest sanctions," Choi said.
"I do not think this country's rules on naked short-selling are looser than others," he added.
The FSC chairman said the Securities and Futures Commission, an internal body at the regulator, will start reviewing investigative reports and potential evidence against Goldman Sachs filed by the Financial Supervisory Service (FSS), Oct. 17.
Even though Goldman Sachs International issued a statement saying that it had made an error in its short-selling orders placed with its Seoul branch, the FSS has been looking into all its transactions from late May to early June.
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| Goldman Sachs CEO Lloyd Blankfein / Courtesy of Goldman Sachs |
This allegedly indicates that Goldman Sachs International never borrowed the stocks in the first place, but reaped gains after the local branch sold them. The investment bank could face a fine of up to 2 billion won if the FSC concludes that it was privy to the naked short-selling.
According to data from the FSC and the FSS gathered by Rep. Kim Byung-wook of the ruling Democratic Party, 69 out of 71 financial companies caught naked short-selling over the past five years were foreign investors.
Short-selling, which enables investors to borrow, sell, buy back stocks and gain returns while betting their prices will fall, is legal as long as the transactions take place within a standard time period of two to three days.
However, naked short-selling is illegal here, as well as in the United States as it could cause more stock volatility through price manipulation via regulatory loopholes.
Both are very risky given stock prices have to drop for investors to reap returns; and listed companies are opposed to such practices. Short-selling is often regulated especially during a financial crisis. Only big institutional investors have the capability to engage in short-selling.
The FSC chief said he will look into whether the regulator will allow retail investors with sound personal credit ratings to take part in short selling. However, he indicated this would be difficult as anyone who wants to engage in this will need sound intelligence about the market, and the resources to bet on whether a forecast stock will fall.
Industry sources agreed, saying this field is not really for small retail investors.
"They cannot play this game and expect to win over institutional investors with abundant data, let alone money, that can sway the market," said an industry source.
The FSC is also expected to come up with a revised debt-service ratio this week that will be enforced as one of the key metrics for banks and nonbanks in measuring individuals' qualifications for loans.
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