A top financial regulator said Thursday alleged cases of naked stock short selling currently under investigation are clear and deliberate violations of local regulations.
Lee Bok-hyun, chief of the Financial Supervisory Service (FSS), also said the country will continue to revise its stock short-selling system if necessary even after the temporary ban on the stock trading practice is lifted at the end of next month.
“As to whether they were mistakes or intentional, I think there could be both. For instance, if a trader had failed to check the balance for a long period of time, they could have been a mistake at first,” the FSS chief said while speaking to a group of reporters at the FSS headquarters in Seoul.
“However, when a person continues to place orders (for stock short selling) without checking the balance for an extended period of time … they cannot but know that there is a problem, and so it remains that they cannot but admit that there must have been some intentions,” he added.
Naked stock short
selling refers to short selling stocks without having secured or placing orders to secure those to be sold.
The FSS announced Monday that it has detected hundreds of suspected illegal stock short-selling cases at nine out of the 14 largest global investment banks (IBs) in South Korea, with an inspection of the other five IBs still under way.
Lee noted some other countries do allow traders to secure stocks up to one or two days after short selling the shares, but that local regulations require them to do so prior to the sale.
“It is correct that (naked short selling) is illegal under our laws,” he said.
“Only, if they say it is so difficult to borrow stocks one day before short selling them and ask us to revise the law, that is something we need to consider, and if borrowing stocks one day prior to short selling really creates no problem in terms of their operations and legal compliance, they simply need to abide by our rules.”
Seoul imposed the temporary ban on stock short selling in November, vowing to
create what it called a “leveled” playing field for investors, including retail investors.
Lee reiterated the need to create a “fair” playing field for all investors.
“Stock short selling is not a derivative … but it is open to far greater losses. Basically, therefore, individual investors engaging in stock short selling by exposing their equity to such a risk is not something to be encouraged,” he told the reporters.
“Still, the argument that we need to create at least similar conditions for those who understand the risk and still wish to engage in such trading does have a point,” added Lee.
Seoul unveiled a new centralized monitoring system to detect and prevent illegal stock short selling last week, raising hopes that the ongoing ban may be lifted as scheduled.
The FSS chief declined to comment directly when asked if the ongoing ban will be lifted, but stressed that the new or revised short selling system can and should be further revised if necessary.
“In general, the system changes as the world c
hanges. For instance, after we bring back stock short selling in any form and in a way to minimize the conflict of interests, should there be an incomplete part while we operate the system, we patch it,” Lee said.
Source: Yonhap News Agency