Financial Supervisory Service Urges Brokerages to Strengthen Risk Management Amid Rising Margin Trading

Financial authorities have called on the investment industry to actively manage risks in response to the rising trend of margin trading and unsettled stock purchases amid increased stock market volatility.

The Financial Supervisory Service (FSS) announced that it held a meeting today (June 24) with the Korea Financial Investment Association and chief risk officers from major brokerage firms to request strengthened efforts in risk management and investor protection regarding recent market volatility.

Seo Jae-wan, Assistant Governor for Financial Investment, who presided over the meeting, noted that the daily average balance of margin loans has surged from 20.9 trillion won last year to 36.3 trillion won last month. He urged firms to move beyond formal credit limit operations and instead implement flexible and preemptive risk management systems to address the growing potential market risks.

He also requested active responses through preemptive risk management and enhanced monitoring, as the daily average balance of unsettled stock purchases (so-called "misugum") has steadily increased from 900 billion won last year to 1.4 trillion won last month.

Assistant Governor Seo emphasized that margin trading can trigger excessive speculative demand during periods of high market volatility and increase the burden on the financial soundness of brokerage firms, necessitating thorough preparation.

He further urged firms to prepare for the possibility of bond defaults due to unpaid balances and the subsequent spread of risk across the market. He also called for an end to business practices that lead to or effectively encourage margin trading without investors being fully aware of the risks.

In addition, he stated that brokerages must strengthen risk disclosures to ensure investors fully understand the structure of margin trading and the risks of forced liquidation, and improve the effectiveness of explanations regarding terms and conditions.

Assistant Governor Seo also advised that brokerages must manage their own financial soundness and liquidity in preparation for increased volatility in stock prices, interest rates, and exchange rates.

He conveyed the need for brokerage firms to independently review the scale and maturity distribution of their short-term funding and to re-examine the adequacy of their emergency funding plans.

He also stated that firms should prepare for interest rate hikes by securing hedging instruments and expand their loss-absorption capacity through the early write-off of non-performing domestic and overseas project financing (PF) assets.

The FSS also ordered the strengthening of systematic management of foreign currency liquidity to prepare for potential rapid fluctuations in the value of foreign currency assets and liabilities, as well as a possible increase in margin calls for Equity-Linked Securities (ELS).

The regulator requested stricter management of sales processes for complex financial products, ensuring that investors are fully informed of product structures and risks. It also asked for appropriate management of foreign exchange and liquidity risks arising from the expansion of foreign currency repurchase agreement (repo) sales by brokerages.

Highlighting upcoming improvements to real estate soundness regulations, such as the introduction of investment limits for real estate, the FSS emphasized the need for preemptive limit management efforts.

The industry pledged to strive for preemptive soundness and liquidity management in preparation for increased market volatility.

The FSS stated, "We will respond in a timely manner to ensure that risk management and investor protection regarding margin trading are properly implemented, including continuous monitoring of leveraged investments and trends in forced liquidations."

The regulator added that it plans to guide brokerage firms to maintain stable financial soundness and liquidity, including by encouraging them to preemptively expand their loss-absorption capacity.
※ Please note: This article was translated by AI and may contain errors.