South Korea will send investigators to Deutsche Bank AG’s Hong Kong offices as regulators probe the cause of a plunge in the Kospi Index on Nov. 11.
The Financial Supervisory Service needs to have “conversations” with Deutsche Bank employees in the city, spokeswoman Kim Soo Mi said, confirming comments by Governor Kim Jong Chang that were reported by MoneyToday, an Internet news provider. The Financial Services Commission, the government’s policy-making body, earlier today said it may limit the number of stock-option contracts investors can own, adding it will monitor markets on Dec. 9, the next expiry day for contracts.
The Kospi tumbled 2.7 percent on Nov. 11, the exchange’s last options expiry date. Korea Exchange Inc. attributed the drop, the index’s biggest since May 25, to “program” selling and began an investigation with regulators that includes sell orders made through Deutsche Bank. Michael West, a Hong Kong- based spokesman for the German lender, declined to comment.
“It’s the increasing prevalence of cross-border electronic trading that may be spotlighted, as regulators come to grips with multi-jurisdictional issues like this,” said Gavin Parry, managing director of Hong Kong-based Parry International Trading Ltd. “As exchange companies move towards global 24-hour platforms to capture liquidity, these probes will become more common.”
The Financial Supervisory Service will send five officials to Hong Kong for about two weeks, MoneyToday said. Spokeswoman Kim declined to comment on whether the agency has approached Hong Kong regulators. South Korea and Hong Kong are part of an international agreement on sharing cross-border regulatory information, said Jonathan Li, a spokesman for the Securities and Futures Commission of Hong Kong. He declined to comment further.
About 1.6 trillion won ($1.4 billion) worth of sell orders on Nov. 11 were made through Deutsche Bank, South Korean regulators said the day after the stock plunge. The Kospi slumped 48 points to 1,914.73 between 2:59 p.m. and 3:01 p.m. in Seoul that day.
Deutsche Bank breached South Korea’s stock exchange rules governing the disclosure of computer-driven trades by filing a report one minute late on Nov. 11, the bourse said on Nov. 15.
The Financial Services Commission’s statement earlier today on the possible options restriction didn’t include any details on the timing of any changes or how many options may be affected. South Korea only limits the amount of futures contracts investors can own, the commission said. The purpose of those measures are to prevent an investor from having an “excessive” impact on markets by holding lots of derivatives, it said.
South Korea plans to strengthen penalties for violating rules related to computer-driven trades, the agency said. It may also require investors owning derivatives above a designated amount to report their holdings and any significant changes to the nation’s financial regulators, the commission said.
Scrutiny of equity-market swings has intensified since May 6, when a 20-minute drop in U.S. equities briefly erased $862 billion of market value. A transaction in Standard & Poor’s 500 Index futures helped spur the retreat, the Securities and Exchange Commission and Commodity Futures Trading Commission said in an Oct. 1 report.
Japanese regulators are considering a U.S.-style rule that limits short sales of shares in companies selling new stock, people with knowledge of the matter said last month. London Stock Exchange Group Plc’s Turquoise trading venue stopped operating for two hours on Nov. 2, with the bourse citing human error that “may have occurred in suspicious circumstances.”
“The influence of derivatives on spot markets has grown a lot, and that increases overall volatility,” said Im Jeong Jae, a fund manager in Seoul at Shinhan BNP Paribas Asset Management Co., which oversees $28 billion of assets.
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