Small investors demand tougher action against BNP Paribas, HSBC for illegal short selling

BNP Paribas headquarters in Paris, France, Feb. 24 / Reuters-Yonhap

Small individual investors, angered by the recent illegal short selling practices of BNP Paribas and HSBC, have called for more stringent measures to prevent a recurrence, even in the face of potentially record-high fines.

The Financial Supervisory Service (FSS) disclosed on Sunday that two Hong Kong-based investment banks had partaken in illegal short selling activities, amounting to an estimated 56 billion won ($41.3 million). The FSS asserts that both banks deliberately and routinely engaged in naked short selling to maximize their fee earnings and reduce expenses. It is preparing to levy the heftiest fines in its history.

In response to the announcement, outraged investors are pressing for even tougher regulations on the matter.

"Even if the financial authorities impose fines of 10 billion won or even 100 billion won, this money goes to the state treasury and not to the individual investors who suffered losses. It's akin to shutting the barn door after the horse has already bolted," Jung Eui-jung, head of Korea Stockholders Alliance, told The Korea Times.

"The focus shouldn't just be on uncovering issues after an incident happens. Financial authorities should proactively protect individual investors. I believe a system to detect naked short selling needs to be established as soon as possible."

The Korea Times reached out to BNP Paribas and HSBC for their official positions and future plans, but both banks chose not to comment on the matter.

Pedestrians walk past a local branch of HSBC in Hong Kong, in this August 2021 file photo. AFP-Yonhap

In Korea, only covered short selling is permitted, wherein stocks must be borrowed before being sold. Naked short selling involves selling stocks without owning or borrowing them first. As sellers are expected to borrow the securities within two days after the trading date, they can face a settlement default if they fail to secure the stocks by this deadline. Due to these risks, naked short selling is strictly prohibited and deemed illegal here.

According to the FSS, BNP Paribas placed naked short selling orders on 101 stocks, including Kakao, amounting to 40 billion won, from September 2021 to May 2022. And from August 2021 to December 2021, HSBC engaged in naked short selling on nine stocks, with Hotel Shilla among them, totaling 16 billion won.

"An investment bank merely facilitates the transaction. Therefore, any profits or losses resulting from price volatility ultimately fall to the investors. It is presumed that they were negligent in the following the legal process in pursuit of fee revenues," said a senior official from the FSS.

The FSS has hinted at the possibility of imposing an unprecedented fine. The most substantial penalty previously issued for illegal short selling was 38.7 billion won this March. Some speculate that the new fine might soar into tens of billions of won.

However, no measures, such as trading restrictions or market expulsion, are currently in place for those involved in illegal short selling activities. Rep. Yun Chang-hyun of the ruling People Power Party accordingly introduced an amendment to the Capital Markets Act in May, but the proposal is still pending in the standing committee of the National Assembly.