SOUTH Korea has decided to impose a total fine of 26.5 billion won (S$27 million) on two global investment banks and a local unit of one of the firms for naked short selling, marking the nation’s largest-ever penalty against the illegal practice.

“The violations were a grave matter that hurts the market order and investor trust,” the Securities and Futures Commission, which functions under the Financial Services Commission (FSC), said on Monday (Dec 25)following its decision. The naked short selling transactions by the three parties, which lasted for months, were viewed to be “intentional”, it added.

The FSC will also ask prosecutors to investigate the two international investment banks.

The regulator did not identify the entities and said their names will be released two months from now. Bloomberg News reported last week that South Korea was seeking at least 10 billion won in combined fines from BNP Paribas and HSBC Holdings for naked short selling – a practice that involves selling shares without borrowing them first. It is considered illegal in South Korea.

The decision is the latest in efforts by authorities to weed out illegal short-sellers from the local stock market, and comes after authorities in November announced a full ban on short selling until the end of June 2024. Back then, the regulator had said it had discovered “massive” illegal naked short-selling by global investment banks.

The FSC recently slapped combined fines of two billion won on three unnamed global hedge funds for violations of capital markets law, including illegal short selling and unfair trades. Bloomberg News has reported that one of the funds was Segantii Capital Management.

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Earlier this year, a penalty of 3.9 billion won was imposed on Erste Asset Management, which was among the initial companies to face bigger fines under the new and more stringent rules on short selling.

Public perception of short sellers in Korea remains deeply negative, with local retail traders having staged protests against these activities from time to time. They have also made sporadic coordinated attempts to drive gains in stocks targeted by short sellers, leading to increased volatility. BLOOMBERG