BNP Paribas and HSBC, two global investment banks, have been slapped with a massive fine of 26.5 billion won ($20.3 million) by Korea's top financial regulator, the Financial Services Commission (FSC), for engaging in illegal short selling practices. This is the largest fine ever imposed on financial institutions since the penalty system for short selling violations was introduced in April 2021.

According to the FSC, both BNP Paribas and HSBC violated Korea's Capital Markets Act by conducting naked short selling over an extended period of time. BNP Paribas' Hong Kong branch engaged in naked short selling of 101 Korean stocks worth over 40 billion won between September 2021 and May 2022, without first borrowing those shares. HSBC, on the other hand, placed naked short selling orders totaling 16 billion won for nine Korean stocks, including Hotel Shilla, from August to December 2021.

Naked short selling, a trading practice largely banned in major countries since the late 2000s, involves selling shares without actually borrowing them first. The FSC emphasized that both firms displayed a clear intent to engage in short selling violations, despite being aware of the insufficient quantity of shares available for sale.

Notably, a domestic securities company affiliated with BNP Paribas was also found to have committed a serious violation of the Capital Markets Act for receiving naked short selling orders without taking measures to prevent the repeated shortage of balances.

The FSC categorized the violations by BNP Paribas and HSBC as grave matters that harm the transactional order of capital markets and investors' trust. In response to the illegal short selling practices discovered, the FSC implemented a complete ban on short selling in the domestic stock markets until the end of June next year. The regulatory authority is also currently investigating other global investment banks and entrusted securities companies for potential short selling violations.

To counter concerns about illegal short selling, the FSC plans to establish a computer system capable of detecting and preventing such practices during the period of the prohibition, aiming to alleviate worries among retail investors.

The steep fine imposed on BNP Paribas and HSBC serves as a stern warning to financial institutions, reinforcing the importance of adhering to regulations and maintaining the integrity of capital markets.