Big Fines on Foreign Investment Banks for Naked Short Selling in Korea - Implications

• The FSS mentioned it has uncovered 211 billion won of naked short sales by Credit Suisse and 8 other global banks of Korea-listed stocks between 2021 and 2023.

• The current ban on short selling stocks could be extended to at least 1H 2025.

• The Korean government's imposing these large fines on the foreign brokers is sending a message to the foreign brokers to not engage in naked short selling.

In the past week, the Korean regulators announced big fines on major foreign investment banks for their naked short selling of Korean stocks in the past several years.

The Financial Supervisory Service (FSS) mentioned it has uncovered 211.2 billion won ($156 million) of naked short sales by Credit Suisse, Nomura Securities and seven other global banks of Korea-listed stocks between 2021 and 2023. Credit Suisse had the largest amount of imposed penalty of about 50 billion won. If Credit Suisse ends up paying 50 billion won in fines, this would be the largest ever penalty for naked short selling in Korea imposed on a broker.

FSS stated that there was a total of about 211 billion won of naked short sales by nine major global banks of Korea listed stocks between 2021 and 2023. Of this total amount, Credit Suisse and Nomura accounted for about 117 billion won of the naked short sales (55% of total). The amount of the fines is estimated to be about half of the naked shorting transaction value conducted between 2021 and 2023 since South Korea adopted laws to criminalize illegal short sales in 2021.

Ban on Short Selling Stocks Likely to be Extended Until 1H 2025

One of the major implications of the big fines on the foreign brokers for naked short selling in Korea is that the ban on the short selling of stocks in Korea is likely to be extended to 1H 2025. On 6 November 2023, the Korean government announced that it will temporarily ban short selling stocks until end of June 2024.

On 24 April 2024, the FSS hinted that the regulators may extend the ban on short selling until next year. At this time, the FSS unveiled for the first time its plan to build a computer system to prevent naked short selling called NSDS (Naked Short Selling Detection System).