Financial Authorities "CFDs Vulnerable to Unfair Trading... Initiate System Improvement"

Published 02 May.2023 16:08(KST)

Thorough Investigation of Stock Manipulation Cases and Active Institutional Improvements for CFDs

On the 2nd, the Financial Services Commission held a meeting with executives from the Financial Supervisory Service and the stock exchange to promptly investigate the recent stock price manipulation allegations, clearly reveal the methods and collusion of the involved parties, and thoroughly improve areas requiring institutional enhancements such as Contracts for Difference (CFD).

On the afternoon of the 2nd, Kim So-young, Vice Chairman of the Financial Services Commission, emphasized at the meeting of executives from the Financial Services Commission, the Korea Exchange, and related parties held at the Government Seoul Office in Jongno-gu, Seoul, regarding the stock price manipulation allegations, "We will promptly investigate to clearly reveal the methods of market manipulation and whether there was collusion among the involved parties, and thoroughly improve any necessary areas in the system, such as CFDs."

Contracts for Difference are over-the-counter derivative contracts that settle only the price difference without direct ownership of underlying assets such as stocks. By paying a 40% margin, leveraged investment is possible, bearing a similar nature to margin loans.

At the meeting, Vice Chairman Kim So-young stated, “Although the investigation of the case is ongoing, separately, we will first review the institutional improvements needed for CFDs, which have recently been raised, and proactively and swiftly implement preemptive enhancements. If additional improvements are identified based on the investigation results, we will continue to make further improvements.”

Current issues raised regarding the CFD system include: ? The actual owners are individuals, but purchases are recorded as made by foreign securities firms or institutions ? Unlike margin loans, CFD credit limits are not included in securities firms’ credit provision limits (100% of their own capital) ? Insufficient disclosure of purchase balances by stock ? Most investors are individual professional investors.

Furthermore, Vice Chairman Kim explained, “In the case of CFDs, if abused by certain manipulation groups in low-liquidity stocks or stocks banned from short selling, there is vulnerability to unfair trading such as price increases through wash trading. As the rapid stock price decline expands further, problems may arise not only for investors but also for securities firms’ risk management.”

Finally, he added, “Taking this incident as an opportunity, the Financial Services Commission, Financial Supervisory Service, and the stock exchange will strengthen their management and supervision efforts against unfair trading activities in the capital market. We will strive to prevent such incidents from recurring.”