South Korea's securities industry is stepping up voluntary controls to curb risks from excessive leveraged investing. Major brokerages will cut their credit extension ceiling to 90% of equity capital and apply separate measures when margin loans become concentrated in a single stock.
The Korea Financial Investment Association said on the 23rd that it will implement the measures, called a plan to strengthen voluntary management of margin lending, together with 10 large securities firms designated as Comprehensive Financial Investment Business operators. Starting Oct. 1, those firms will keep total credit extension, including margin loans, within 90% of their equity capital. That is 10 percentage points below the current legal ceiling of 100% of equity capital. The aim is to preemptively restrain excessive growth in credit extension.
The bar for leveraged investing will also rise. The industry plans to raise the minimum margin requirement for margin loans to 50% from the current 45%, an increase of 5 percentage points. Because the change requires systems development and simultaneous adoption by all brokerages, it will take effect within the year after industry consultations.
The industry also plans to ease concentration of margin loans in individual stocks. If margin loan balances on a single stock exceed 15% of a brokerage's total, the firm will take its own steps, such as reducing limits for individual investors or raising margin requirements. The stock-level controls will apply to new investments from Oct. 19, and the industry is also considering lowering the threshold to 10% depending on market conditions.
Each brokerage will decide on its own how far to cut limits and how to manage them, taking into account its customer base and risk management conditions. The association will check compliance periodically and plans to discuss extending measures such as the 90% credit ceiling and the higher minimum margin requirement to all brokerages, not just the major ones.
"Excessive use of margin loans can magnify investor losses as market volatility widens," said Chun Sung-dae, head of the securities and derivatives division at the Korea Financial Investment Association. "Through voluntary and preemptive management by the industry, we will protect investors and build a trustworthy capital market environment."
Separately, the association and the major brokerages held a meeting of chief risk officers on the 21st and agreed that preemptive management is needed because margin loans can amplify investment losses and the risk of forced liquidation when market volatility increases.
