South Korea's FSS Unveils 2024 Supervisory Plan Targeting Unlawful Short Selling and Stricter Bank Capital Rules

South Korea's Financial Supervisory Service announced its comprehensive supervisory plan for 2024 on 5 February, setting out four strategies and 12 core tasks, including a full investigation into unlawful short selling by the global investment banks most active in Korean short selling, a countercyclical capital buffer and bank-specific additional capital requirements based on stress-test results, and firm enforcement action against institutions found to have improperly marketed and sold Hong Kong H-Index Equity-Linked Securities to retail investors.

SHORT SELLING INVESTIGATION TARGETS GLOBAL BANKS

Short selling has been a contentious issue in South Korea for several years. Allegations of naked short selling — selling securities that a firm has not borrowed or arranged to borrow — have periodically attracted regulatory attention, but the 2024 FSS plan commits to a full investigation of the global investment banks most active in Korean short selling.

The FSS's announcement stated that the investigation would focus on the short-selling practices of global investment banks with significant Korean equity market operations. Regulators will also inspect the order-handling processes of the domestic brokerages that execute global investment banks' orders, including whether they were aware of illegal short sales. Where violations are found, the FSS indicated it would apply strict sanctions.

CAPITAL BUFFERS AND ELS SANCTIONS ALSO TARGETED

Alongside the countercyclical capital buffer, the FSS's plan introduces a differentiated approach under which the specific add-on applied to each bank will be determined by its individual stress-test results rather than a uniform system-wide rate.

The third pillar of the 2024 plan addresses the Hong Kong H-Index Equity-Linked Securities that generated retail investor losses when the underlying index declined. The FSS committed to strict sanctions against financial institutions found to have marketed or sold these products in ways that violated suitability and disclosure requirements.