HSBC (0005) and BNP Paribas were named by Korean media as the two global investment banks that are facing record fines in the country for "routinely and intentionally" engaging in naked short-selling worth a total of 56 billion won (HK$323 million).
Several Korean media, including The Korea Economic Daily and The Chosun Ilbo, pointed out it was the Hong Kong units of the two banks that were suspected of selling shares without even borrowing them first.
The practice, known as naked short-selling, is illegal in South Korea and the banks might be fined by the state's financial regulator, the Financial Supervisory Service.
According to KED's report, HSBC illegally shorted nine stocks, including Samsung's Hotel Shilla with transactions totalling 16 billion won during the August-December 2021 period while hedging its swap contracts with overseas funds.
And BNP did the same with 101 listed companies, including the South Korean mobile platform giant Kakao, for 40 billion won between September 2021 and May 2022.
South Korea's FSS said in a statement that the Hong Kong-based units of two banks conducted naked short sales in several securities between 2021 and 2022, and could have reaped extra profits from them, without naming them.
The proposed fines need to be finalized by a committee at the nation's financial regulator Financial Services Commission, the FSS said, adding that the banks' identities will be disclosed to the public after future proceedings.
While authorities have uncovered and penalized money managers for illegal short-selling in the past, it's the first time such violations have been found at global banks engaged in transactions in Korea, the FSS said.
"This is a serious problem," Kim Jungtae, deputy governor at the FSS, told reporters. "For a long time, they have continued to do naked short-selling while they were aware that the practice is illegal in South Korea."
Both firms could have reaped extra profits from such naked shorts, according to the FSS team that investigated the cases for as long as nine months.
The watchdog said it plans to expand its investigation into other global investment banks and seek cooperation from its counterpart in Hong Kong.
Officials declined to share the metrics behind calculating the fines but said they are set to be the highest on record, given the size of the naked short-selling orders. The current record is a 3.9 billion won fine imposed on Erste Asset Management earlier this year.
Both banks are suspected of naked short-selling, according to reports. Reuters
