The Financial Supervisory Service (FSS) on Thursday summoned auditors from 12 major brokerages and urged them to strengthen internal controls over overseas investment brokerage and advertising, amid heightened volatility in domestic financial and foreign-exchange markets.
The meeting came as controversy mounted over domestic participation in the highly anticipated SpaceX initial public offering.
Mirae Asset Securities recently allowed investors who subscribed to the SpaceX IPO to withdraw their orders by noon after concerns emerged over settlement procedures.
According to people familiar with the matter, differences between U.S. IPO practices and Korea's settlement system could prevent domestic investors from selling their allotted shares on the first day of trading.
Investors may have to wait at least two business days after the listing before they can trade the stock, leaving them exposed to potentially sharp price swings without the ability to exit positions.
There were also market reports that institutional subscriptions had been capped at roughly 30 percent of requested allocations.
The developments fueled speculation among market participants that financial authorities were seeking to curb excessive overseas subscriptions at a time when rising demand for dollars is adding pressure on the won.
The FSS did not mention any specific brokerage or the SpaceX subscription issue in its press release. The regulator also declined to immediately comment on whether it was examining the subscription dispute or reports of institutional allocation limits.
Participants included Seo Jae-wan, assistant governor in charge of the financial investment sector, the heads of the regulator's three financial investment inspection bureaus, auditors from 10 comprehensive financial investment firms, and auditors from Toss Securities and Kakao Pay Securities.
The watchdog said brokerages should review their overall internal procedures to prevent investor damage from excessive marketing related to overseas investments, especially as heightened global uncertainty has increased volatility in stock and foreign-exchange markets.
It also urged brokerages to conduct preemptive self-inspections of risks stemming from concentrated demand for specific products or transactions.
Seo said in opening remarks that investor confidence in the resilience of Korea's capital market becomes increasingly important when volatility rises in stock and foreign-exchange markets.
He added that the regulator would not tolerate market-disruptive conduct that illegally exploits volatility or unlawful sales practices that neglect investor protection.
Seo also warned that the FSS would take strict action against irresponsible sales practices that advertise or recommend high-risk crowded trades while emphasizing only potential returns.
The FSS said marketing of overseas investment products aimed at retail investors has shown signs of overheating and called on brokerages to ensure that investors are not excessively exposed to foreign-exchange risks.
The regulator highlighted several internal-control concerns, including improving investor-protection indicators in performance evaluations, strengthening pre-screening of investment events and advertisements, enhancing oversight of overseas brokerage partners, and rationalizing the calculation of interest rates on foreign-currency deposits.
The FSS also called on brokerages to monitor excessive trading in overseas stocks in the same manner as domestic equities and strengthen alerts for accounts suffering heavy losses so investors can respond more quickly.
The regulator asked brokerages to share the discussions with senior management, including chief executives, and said it plans to send a letter outlining key internal-control precautions related to overseas investment brokerage and marketing.
The meeting came as Korea's financial markets remain under intense pressure.
Compared with the 139.7 trillion won recorded on June 4, investor deposits have shrunk by more than 12 trillion won in just four trading sessions, suggesting substantial capital has flowed into stocks, overseas investments and other risk assets.
The KOSPI ended Thursday up 33.13 points, or 0.43 percent, at 7,763.95, but only after one of its most volatile trading sessions in recent years.
The benchmark index opened down 2.86 percent and at one point plunged 4.35 percent to 7,394.46 before rebounding sharply and briefly topping the 7,800 mark.
The KOSPI swung from negative to positive more than 50 times during the session, with an intraday range exceeding 406 points.
The Korea Volatility Index (VKOSPI), often referred to as the market's fear gauge, closed at 87.30. Although down 1.19 percent from the previous session, it remained above 80 for a third consecutive trading day and briefly climbed to 89.47 during the session.
The won weakened further to 1,528.9 per dollar as of 3:30 p.m. in Seoul, up 4.7 won from the previous session and hovering near levels associated with past financial crises.
Foreign investors continued their relentless selling streak, unloading a net 1.48 trillion won worth of KOSPI shares on Thursday. They have now been net sellers for 24 consecutive trading sessions.
Foreigners have sold nearly 30 trillion won worth of KOSPI stocks during the first eight trading sessions of June, following net sales of 51.5 trillion won in May.
The sustained outflows have helped drive the benchmark index down nearly 9 percent this month despite aggressive buying by retail investors.
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