SEOUL, March 23 (AJP) - Leveraged stock buying by retail investors remained feverish on Monday despite 6-percent rout on escalating Gulf war fears, prompting the financial regulator to warn on forced liquidations.
The Financial Supervisory Service issued a set of guidelines on Monday aimed at preventing disputes in margin trading, saying recent sharp swings in the domestic stock market had heightened the risk of forced sell-offs for investors using credit financing.
“When the domestic stock market has recently shown sharp volatility, the risk of forced liquidation for investors using credit financing has increased, and related disputes and complaints are being steadily filed,” the regulator said.
The FSS noted that investors are often swept up in fear of missing out during rallies. As share prices rise, it becomes harder to enter the market with cash alone, pushing some investors to rely on margin loans. When prices then fall sharply, mandatory liquidations are triggered if the collateral ratio drops below 140 percent.
Outstanding margin balances surged 21.5 percent in just over two months, rising from 27.4 trillion won ($18.13 billion) at the start of the year to 33.3 trillion won as of March 20.
Saying many disputes stem from investor misunderstanding or oversight, the FSS issued several reminders.
For complaints that investors did not receive advance notice before forced liquidation, the regulator advised checking whether the brokerage’s phone number had been blocked. Under the Capital Markets Act, brokerages are required to notify clients before carrying out a margin call sale.
In cases where investors argued that more shares were sold than necessary to cover the collateral shortfall, the FSS said they must take into account the so-called haircut, or discount rate. Forced liquidations are typically executed at prices discounted by up to 30 percent from the previous day’s close, and the 140 percent collateral ratio should be calculated on that basis.
The watchdog also cautioned against relying on intraday price movements when calculating collateral ratios. Even if the ratio appears stable during trading hours, a forced liquidation can still occur if the requirement is not met at the closing price.
It also stressed that investors should not treat forced liquidation itself as the reason they failed to make a profit.
If a liquidation involves multiple stocks and an investor wants to protect a particular holding, the investor must request a change in liquidation priority in advance through the brokerage. For example, if the default order is A-B-C, the investor may ask that B and C be sold first to preserve stock A.
The FSS added that disputes involving overseas stocks are also common, as many investors underestimate how exchange-rate swings and the higher volatility of individual foreign stocks can quickly erode collateral ratios. It also noted that interest-charging methods on margin loans differ by brokerage, and that prolonged delinquency on unsettled receivables may make future credit trading more difficult
While the KOSPI ended Monday 6.5 percent lower, retailers bought a net 7 trillion won, matching the selling by foreign and local institutions.
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