Financial Authorities to Strengthen CFD Investor Protection Starting September

Strengthening Trading Requirements for CFD and Other Over-the-Counter Derivatives

Financial authorities will strengthen the trading requirements related to Contracts for Difference (CFD) at securities firms, which have been used as channels for stock price manipulation, starting in September. The move aims to enhance investor protection measures.

On the 19th, the Financial Services Commission (FSC) announced that at the regular FSC meeting chaired by Chairman Kim Ju-hyun, a partial amendment to the Financial Investment Business Regulations, including the CFD supervision system and strengthened protection measures for individual investors, was approved. This amendment is a follow-up measure to the "CFD Regulatory Supplement Plan" jointly announced by the FSC, Financial Supervisory Service, Korea Exchange, and Korea Financial Investment Association on May 30.

According to the amended notice, trading requirements for over-the-counter derivatives such as CFDs will be strengthened. Previously, all individual professional investors were allowed to trade, but under the new amendment, only those individual professional investors with sufficient investment experience in high-risk financial investment products will be permitted to trade over-the-counter derivatives.

Specifically, the investment qualification requires having an average monthly balance of at least 300 million KRW at the end of the month for at least one year within the past five years. When a securities firm verifies whether an investor meets this investment requirement for the first time, it must confirm the investor’s identity face-to-face (including video calls). Securities firms are also required to notify investors of the related risks.

CFD balances will become more transparent. A new provision requires securities firms engaged in CFD trading and brokerage to submit investors’ CFD balances daily to the Korea Financial Investment Association. This is to support investors’ accurate investment decisions through disclosure of CFD balances. Additionally, the actual investor type involved in stock trading under CFDs will be indicated through amendments to the Korea Exchange’s business regulation enforcement rules, which will be prepared and implemented simultaneously.

Measures to eliminate regulatory arbitrage with the credit loan system are also reflected. The minimum margin rate regulation (40%), currently operated under the Financial Supervisory Service’s administrative guidance, will be made permanent. Securities firms must include the scale of CFD handling within their credit extension limits and manage it within 100% of their own capital. This is expected to reduce incentives for securities firms to indiscriminately expand CFD business and strengthen risk management related to CFDs.

Related systems will be supplemented to ensure that protection measures for individual investors operate more effectively. When an individual is designated as a professional investor for the first time, identity verification must be conducted face-to-face or via video call. The validity period for designation as an individual professional investor, which had been applied under industry self-regulation, will be explicitly stated in the regulations, requiring securities firms to reconfirm qualification requirements every two years. Furthermore, any act by securities firms to solicit investors to apply for professional investor designation is prohibited as an unfair business practice.

This measure will be implemented from September 1 after going through procedures such as investor guidance, IT development at securities firms and related institutions, and incorporation into internal control systems. The Korea Financial Investment Association is currently preparing a model code for industry-wide risk management related to CFDs. Securities firms that complete IT system and internal control system upgrades reflecting the amendments to the Financial Investment Business Regulations plan to resume CFD business after September 1.

For over-the-counter derivatives other than CFDs, whose trading is currently restricted, the amendments will apply from December 1, considering that existing investors are still trading. The inclusion of securities firms’ CFD handling scale within credit extension limits will be phased in, with 50% applied by the end of November and 100% from December 1.

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