Financial Authorities Clamp Down on Securities Industry's 'High-Interest Margin Loans'... Rationalization Plan to Be Announced Soon

[Asia Economy Reporter Koh Hyung-kwang] Financial authorities plan to curb securities firms' indiscriminate calculation of margin loan interest rates. They are expected to soon announce measures to rationalize the margin loan interest rates applied when investors borrow funds from securities firms to purchase stocks.

On the 27th, according to financial authorities, the Financial Services Commission is in the final stages of discussions with the Korea Financial Investment Association to improve the "Model Guidelines for Loan Interest Rate Calculation by Financial Investment Companies."

Currently, securities firms calculate interest rates individually based on the association's model guidelines. These guidelines separate funding costs and additional interest rates, requiring each company to calculate rates based on "reasonable standards." However, financial authorities view the lack of specific criteria as resulting in a virtually "blind" interest rate calculation process.

According to the model guidelines, securities firms set short-term interest rates for periods of 30 days or less at 4-7%, and long-term interest rates for periods of 91 days or more at 7-9%. Although there is considerable variation in rates among securities firms, the most urgent issue is that investors have no way to know the basis for these calculations.

A Financial Services Commission official stated, "While the base interest rate has been lowered several times, most securities firms have not reduced their margin loan interest rates even once," adding, "It is necessary to regularly disclose how funding costs are determined and how additional interest rates are calculated."

The format for announcing margin loan interest rate calculations is expected to take the form of a self-regulatory measure by securities firms through improvements to the Korea Financial Investment Association's model guidelines.

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