Increase in Forced Liquidation Ratio (10% Range) Amid High-Intensity Fed Tightening in June

Unpaid Balance Forced Sales Account for Over 10% in 10 Instances This Year
4 Occurrences Concentrated in June
Short-Term (Unpaid Balance) Leverage Investors Suffer Heavy Losses

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] In June, when the United States implemented high-intensity tightening, the proportion of forced liquidation relative to margin debt (in the 10% range) increased. As market volatility increased, it appears that short-term (margin) leveraged investors suffered significant losses.

According to the Korea Financial Investment Association on the 23rd, as of the 21st, the proportion of forced liquidation relative to margin debt was recorded at 10.3%. The amount of forced liquidation relative to margin debt in discretionary trading was 26.079 billion KRW.

Margin trading refers to investors borrowing money from securities firms to buy stocks and repaying the money. The repayment period is short, only three trading days. If the money is not repaid within this period, the securities firm forcibly sells the stocks held as collateral. This is called forced liquidation.

This year, the proportion of forced liquidation rose to the 10% range 10 times. Once each month from January to April (January 26 - 11.7%, February 15 - 10.7%, March 14 - 10.5%, April 26 - 10.0%) occurred. In May, when the Federal Reserve implemented a big step (raising the base interest rate by 50bp at once), it happened twice (May 10 - 11.2%, May 11 - 10.0%), and in June, when a giant step (75bp increase) was taken, it clustered four times (June 14 - 10.2%, June 15 - 13.1%, June 16 - 10.0%, June 21 - 10.3%).

The KOSPI volatility shows a similar trend. The KOSPI, which barely held the 3000 level at the end of last year, has been declining since the beginning of the year, with the decline accelerating after the tightening speed increased in May (big step) and June (giant step).

Over one year (June 24, 2021 ? June 22, 2022), the KOSPI fell 28.7% from 3286.10 to 2342.81. In about six months this year (January 3, 2022 ? June 22, 2022), the index decline rate reached 21.6%. After the Fed’s consecutive high-intensity tightening from May (May 2 ? June 22), the KOSPI index decline rate was 12.8%.

A representative from the Korea Financial Investment Association explained, "If the credit balance numbers not captured in the statistics are included, the scale of forced liquidation could be even larger," adding, "As market volatility increases, the proportion of short-term forced liquidation appears to have risen."

This content was produced with the assistance of AI translation services.