Increased Market Volatility Prompts FSS to Call for Stronger Controls on Leveraged Investments

Meeting to Strengthen Risk Management Systems for Margin Loans at Securities Firms
Emphasis on Investor Protection
"Urging Cautious Operation of Events That Encourage Investment"

The Financial Supervisory Service has instructed domestic securities firms to implement investor protection measures related to leveraged investments. This decision was made in response to heightened volatility in stock markets originating from the Middle East, which could increase investor losses due to forced liquidations and other factors. The authority urged firms to exercise caution in running interest rate and commission fee promotions that could encourage investors, and confirmed its intention to inspect the appropriateness of securities firms’ margin loan promotions and credit loan limits if necessary.

On the afternoon of March 11, the Financial Supervisory Service announced that it held a meeting on "Strengthening Risk Management Systems for Securities Firms’ Margin Loans" at the Korea Financial Investment Association’s main conference room in Yeouido, chaired by Deputy Governor Hwang Sunoh, and attended by executives in charge of margin loans from 11 major securities companies.

At the meeting, Deputy Governor Hwang assessed that the current volume of margin loans and forced liquidations was at a manageable level, but pointed out, "Amid the recent increase in stock market volatility, leveraged investments such as margin loans could become a risk factor." As of March 6, the margin loan balance stood at 32.8 trillion won, equivalent to 0.6% of the market capitalization. During the first week of March (March 3–6), the daily average amount of forced liquidations in leveraged investments was 83.9 billion won, accounting for 0.13% of the total transaction value of 64 trillion won.

Deputy Governor Hwang emphasized, "As investments using margin loans are on the rise and market volatility is increasing due to factors such as heightened geopolitical tensions in the Middle East, investors with insufficient repayment capacity may face increased losses from forced liquidations. Therefore, it is crucial to ensure that investors are fully aware of the associated risks." The investor guidance included advice to make careful decisions about stock investments with loans, considering repayment capability and financial planning, and to regularly check collateral maintenance ratios, as large-scale forced liquidations may occur in the event of a sharp stock price drop.

In addition, securities firms were instructed to re-examine their risk management systems for leveraged transactions, such as margin loans and contracts for difference (CFDs), and to proactively prepare for increased market volatility. The Financial Supervisory Service explained that it is necessary for firms to conduct internal reviews of investment limits such as credit provision, enhance their risk management systems by sharing industry best practices, and operate margin loan interest rate adjustments or commission promotions with caution, to avoid inciting excessive investor risk-taking.

The industry also expressed agreement with the authorities’ awareness of issues and management direction concerning leveraged investments, and confirmed their intention to respond to increased market volatility through proactive risk management measures. It was also stated that they plan to strengthen risk disclosure and investor protection, for example, by using visual materials to explain the possibility of losses to investors.

A spokesperson for the Financial Supervisory Service said, "We will continue to provide guidance to investors in preparation for potential increases in market volatility, and will continually review the implementation of necessary measures for investor protection and market stability." The spokesperson added, "If necessary, we will also conduct inspections of securities firms’ margin loan promotions and the appropriateness of credit loan limit management."

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