[Reporter’s Notebook] Ineffective Grace Period for Forced Sale Suspension Measures

[Asia Economy Reporter Hwang Yoon-joo] "Postponing forced liquidation in a bear market is ineffective. It can increase losses for both investors and securities firms. It is merely a gesture to show that financial authorities are taking action."

This is the assessment of a CEO of a certain securities firm regarding the forced liquidation postponement measure. The opinions of asset management industry professionals, capital market experts, and professors are similar.

On the 1st, the Financial Supervisory Service (FSS) announced that securities firms would be exempt from the obligation to maintain credit loan collateral ratios. Within about ten days, not only major securities firms but most extended the forced liquidation settlement date by one day.

The FSS’s purpose is "investor protection." It can be interpreted as giving investors a chance to cut losses themselves. It means to sell off temporarily during a rebound in a highly volatile market. There is also the rationale that it can partially defend against a larger market decline caused by an increase in forced liquidations due to falling stock prices.

However, the market criticizes this measure as a misunderstanding of the meaning of forced liquidation. A securities firm CEO pointed out, "Extending the forced liquidation grace period by one day in a falling market can increase a 30% loss to a 50% loss," adding, "Forced liquidation during a continuous price decline is the last resort for recovering investment funds." If individual investors’ losses increase, securities firms’ losses also grow.

The market situation is heavily influenced by external factors such as inflation, a strong dollar, and war. Everyone is aware of this. Regarding the implementation of the forced liquidation postponement for three months, another industry insider said, "The financial authorities gave guidelines. They seem to think that after three months, the peak of inflation will have passed and the Russia-Ukraine war may be resolved."

Postponing the forced liquidation settlement date by one day cannot prevent investor losses or stock price declines. If the financial authorities intended this measure to calm market participants’ sentiment, it is a misjudgment. It only signals that the financial authorities can change rules to show they are ‘working’ during a crisis.

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