South Korea’s financial authority slapped a fine of near 700 million won ($630,744) on 10 foreign securities firms for engaging in outlawed naked short selling as it tightens supervision on illicit profiteering through short trade before the strategy is allowed back in the Seoul bourse.

The top-decision-making Securities & Futures Commission of the Financial Services Commission (FSC) at its regular meeting on Wednesday decided to impose a penalty of 685 million won on 10 overseas-based securities companies for naked short selling of locally-listed stocks in violation of the relevant rules from January 2018 to July 2019.

Naked short selling refers to illegal practice of short-selling shares without first borrowing them or ensuring that they can be borrowed. Korean authorities have prohibited naked short selling since 2000 but the Korean market is seen as a hotbed for naked shorting due to relatively light penalties.

The accused have placed short orders without backing of the shares and bought back the shares at cheaper prices. Others capitalized on the discrepancies between paper and electronic systems and other loopholes to feign stock ownership.

The authority found “severe” negligence in the liability of a financial entity for the grounds of levying the fines.

It will frequent the supervision on naked shorting every month from past six-month period. It will also complete probe on domestic market makers on their short practice records by next month.

Stronger penalties on illicit short selling will go into effect from April 6, from which it becomes mandatory for institutions leave account records on short sale.

Korea will remove the ban on short selling enforced since March last year first for large-cap stocks in May.

By Lee Soo-min

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]