Regulator weighs tighter rules on credit trading as securities firms discuss response plans with KOFIA
The Financial Supervisory Service is stepping up efforts to curb a rise in debt-financed investing, calling for stronger consumer protection measures at brokerage firms.
The measures include restricting trading on credit by minors and requiring elderly investors to go through additional confirmation procedures.
The FSS announced the plans Thursday at a public briefing on its financial consumer protection efforts held at its headquarters in Yeouido, Seoul.
Lee Se-hoon, a senior deputy governor at the FSS, said at a briefing earlier in the day that the regulator was discussing the details with the Financial Services Commission and other relevant agencies.
“We are in the final stage of coordinating opinions, so we will provide details separately once they are finalized,” Lee said.
The FSS plans to improve brokerage firms’ practices for credit financing and trading on credit. It will restrict trading on credit by minors and require elderly investors to submit additional forms.
Investors would also be able to see simulated scenarios showing when forced selling could occur and how much they could lose. Procedures for notifying investors ahead of forced selling would also be improved.
Brokerages are also preparing their own measures in response and discussing rules and risk-management measures for leveraged trading with the Korea Financial Investment Association.
The FSS also plans to inspect how brokerage firms manage accounts held by minors, including stock-backed loans and complex investment products available through such accounts.
Brokerage firms have recently taken their own measures to restrict trading on credit by minors. Major brokerages that had allowed such transactions have moved to block them after the outstanding balance of such transactions in minor accounts surged to around 200 million won ($145,000).
The measures were aimed at preventing parents from using their children’s accounts for leveraged investments and limiting the risk of forced selling caused by unpaid settlements.
Credit financing refers to a transaction in which investors borrow money from brokerage firms to buy stocks. Trading on credit allows investors to buy stocks by paying only part of the purchase price upfront and settling the remaining amount within a set period. If the collateral ratio falls below a certain level due to a decline in stock prices or investors fail to repay the outstanding amount on time, brokerage firms can forcibly sell their shares.
Debt-financed investing has been picking up again in recent months. According to the Korea Financial Investment Association, credit-financing balances stood at about 33.07 trillion won as of Wednesday, up 241.6 billion won from the previous day. The balance has risen for three consecutive trading days from 32.26 trillion won on Sept. 11, increasing by 808.6 billion won over the period.
Credit-financing balances had declined following tighter rules on single-stock leveraged exchange-traded funds, but have recently begun rising again.
The FSS also plans to respond to concerns that excessive leverage could amplify market volatility. It will continue to closely monitor market volatility, including by implementing contingency plans in stages depending on market conditions.
Lee said the use of leverage in Korea’s capital markets had increased significantly recently, adding that losses stemming from leveraged investments remained a concern despite relatively calmer market conditions.
“Leverage-based investments have increased significantly in Korea’s capital markets,” Lee said. “Although the market is relatively stable now as volatility has eased, concerns over losses stemming from leveraged investments continue to be raised.”
“We are approaching the issue with a focus on reducing excessive leverage,” he said.
ch0221@heraldcorp.com
