South Korea's Financial Services Commission (FSC) and Financial Supervisory Service (FSS) announced penalties totalling KRW 83.65 billion — approximately USD 60 million — against 13 global investment banks on 12 March 2025. The sanctions conclude a comprehensive multi-year investigation into illegal naked short-selling conducted by major international financial institutions in Korean equity markets and represent the most significant regulatory enforcement action taken against short-selling misconduct in South Korea's capital market history.
Naked short-selling — the practice of selling shares short without first borrowing or arranging to borrow the underlying securities — is prohibited under the Korean Capital Markets Act. The FSC and FSS determined that the 13 banks had engaged in such practices, undermining the integrity of the domestic equity market and disadvantaging other participants, particularly domestic retail investors who have long argued that foreign institutional players used the practice to suppress prices and generate profits at their expense.
A MULTI-YEAR INVESTIGATION REACHES ITS CONCLUSION
The investigation that produced the March 2025 penalties was initiated following sustained pressure from retail investor groups and public calls for regulatory action on what was widely perceived as an uneven playing field in Korean equity markets. Domestic retail investors, who hold a meaningful proportion of South Korean equities directly, had consistently argued that foreign institutional short-sellers operated with advantages that the existing supervisory framework was not equipped to detect or deter effectively.
Korean authorities responded to those concerns by suspending short-selling for domestic retail investors in November 2023, pending a comprehensive regulatory review. The multi-year scope of the subsequent investigation reflects the complexity of examining trading records across 13 distinct institutions, each operating through separate prime brokerage and execution arrangements across multiple trading systems and jurisdictions. Regulators needed to reconstruct trading sequences across a very large number of transactions to establish whether securities had been borrowed before they were sold short, a technically demanding evidentiary process that took months to complete.
The FSC and FSS used the investigation period not only to build the evidentiary basis for enforcement but also to design an improved supervisory framework that would address the structural weaknesses the investigation had exposed in how short-selling was being monitored and enforced in Korean markets.
REVISED CAPITAL MARKETS ACT AND FUTURE OVERSIGHT
In parallel with the enforcement action, a revised Capital Markets Act came into effect on 31 March 2025, introducing enhanced provisions to improve short-selling oversight and transparency across Korean financial markets. The new legislation was designed to close the regulatory gaps that had allowed naked short-selling to persist, including requirements for more rigorous pre-trade borrowing checks, improved real-time reporting obligations for short-position holders, and strengthened penalties for violations to ensure that the deterrent effect of the rules is commensurate with the scale of potential profits from non-compliance.
The combination of a landmark enforcement action and simultaneous legislative reform signals a decisive shift in the regulatory posture of Korean financial authorities towards foreign institutional participants operating in domestic markets. Global investment banks with Korean market access will be expected to invest in compliance and surveillance system upgrades to meet the higher standards now embedded in the revised Act, with the FSS expected to conduct proactive and ongoing supervision of short-selling activity going forward.
The penalties announced on 12 March 2025 send a clear deterrent signal to the international investment banking community: Korean regulators have developed both the investigative capacity and the legal tools to pursue and sanction short-selling misconduct, and they are prepared to deploy them against institutions of any size or global standing when the evidence warrants it.