A sharp selloff in several Korean gas stocks this week due to margin calls prompted the regulator to clamp down on the mounting risks posed by leveraged equity trading.
(Bloomberg) — A sharp selloff in several Korean gas stocks this week due to margin calls prompted the regulator to clamp down on the mounting risks posed by leveraged equity trading.
The Financial Supervisory Service met with 35 securities firms on Friday and asked them to reduce the dangers associated with such products, including refraining from the excessive promotion of leveraged equities wagers.
Brokers including Shinhan Securities Co. and DB Financial Investment Co. halted all leveraged trading on eight stocks which plunged sharply this week, including gas distributor Samchully Co. Others like Samsung Securities Co. and Korea Investment & Securities Co. are stopping trading on a type of derivative product known as contracts for differences.
The moves highlight the risks stemming from Korean individual investors taking out an increasing amount of debt to buy equities, a feature that suggests a recent rally in the country’s stocks may be partly built on lending. Leveraged trading rose this month to 20.1 trillion won ($15 billion) as of April 26, near the highest since June 2022, according to Korea Financial Investment Association data.
“Market volatility is likely to increase with growing margin debt,” said Seo Sang Young, a strategist at Mirae Asset Securities Co.. “It’s one of the factors that may add to volatility as if a problem happens, margin calls could accelerate market drops.”
The regulator and brokerages also agreed Friday to prepare contingency plans against possible liquidity risks stemming from a potential prolonged slump in the nation’s property market. FSS Governor Lee Bokhyun said Tuesday that he’s concerned about increasing risk of losses from investment based on excessive leverage amid heightened volatility in stocks and bonds.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.