KOREAN REPUBLIC: FSS fines firms for breach of prohibition on South Korea naked short selling

Thursday November 29 2012

The Financial Supervisory Service (FSS) has fined three foreign investors and three financial investment companies for violating Korean Republic short selling rules at a provisional meeting on November 29, 2012.

Naked short selling is prohibited under the Financial Investment Services and Capital Market Act in Korea to ensure stability and fair pricing in the securities market.The violations were as follows:

• A Hong Kong-based inter-broker entered the sale orders of securities it does not own under the conditions set out prior with its client (an Australian asset manager).
• A Hong Kong-based fund entered duplicate sales orders in settling over-the-counter derivatives contracts for arbitrage purposes.
• An Australian investment company sold shares it does not own repetitively in its investment strategy using short-term volatility in Korea and Asian markets.

All three of the parties listed above failed to deliver securities after short sales on the settlement date and their Korean brokers settled the trades on the following day.

The FSS reminded firms that they need to check if stocks are owned or borrowed before accepting sale orders and strengthen internal control over operational risks in entering sale orders.

The FSS stated it will conduct intense review of short sale violations by foreign and institutional investors and taking stern action against any violation. In addition, it is increasing scrutiny of supervisory and compliance monitoring responsibilities of brokers regarding short sale violations and delivery failure management.

Click on the above link for teh press release.