FSS summons chief risk officers of 10 major brokerages amid surge in margin financing and unsettled trades; margin financing balance hits 36 trillion won, unsettled trade balance reaches 1.4 trillion won; regulator urges soundness and liquidity checks as forced selling jumps nearly fourfold

Financial Supervisory Service Deputy Governor Seo Jae-wan [FSS]
Financial Supervisory Service Deputy Governor Seo Jae-wan [FSS]

The Financial Supervisory Service summoned the chief risk officers of major brokerages Wednesday, ordering them to strengthen risk management and step up investor protection measures amid rising stock market volatility and a surge in credit trading.

The FSS, together with the Korea Financial Investment Association, held a meeting at the association's office in Yeouido, Seoul, chaired by Deputy Governor Seo Jae-wan of the financial investment division, with chief risk officers from 10 major domestic brokerages in attendance.

The meeting was convened to discuss brokerage soundness and investor protection as stock market trading has jumped and the scale of margin financing and unsettled trades has expanded sharply.

According to the FSS, the average daily balance of margin financing rose from 20.9 trillion won ($13.6 billion) last year to 36.3 trillion won in May. Over the same period, the unsettled trade balance grew from 900 billion won to 1.4 trillion won.

"Rather than limiting yourselves to managing formal ceilings, you must build a preemptive and flexible risk management framework that takes overall market conditions into comprehensive account," Deputy Governor Seo said.

On unsettled trades in particular, Seo said they can fuel excessive speculative demand and increase the burden on brokerage soundness when market volatility rises, and called for thorough monitoring and proactive responses.

The FSS also urged brokerages to be on alert for sales practices that allow unsettled trades to occur without investors' full awareness, or that in effect encourage such trades.

Forced selling triggered by margin financing and unsettled trades has also been rising rapidly. The average daily volume of forced selling at the 10 major brokerages jumped to 373.6 billion won in May, roughly 3.7 times the average of 100.2 billion won last year.

In response, the FSS called on brokerages to strengthen risk disclosures so that investors can fully understand the structure of margin financing and unsettled trades, the conditions under which forced selling is triggered, and the potential scale of losses.

The regulator also said brokerages should provide tailored explanations suited to each investor's level of understanding, and improve the effectiveness of their disclosure obligations through plain-language terms and conditions and the use of visual aids.

The FSS said brokerages must also prepare for growing short-term liquidity needs driven by higher stock trading volume. The average daily value of domestic stock trades jumped from around 19 trillion won last year to 66.6 trillion won in the first quarter of this year.

The FSS said brokerages should review the scale and maturity structure of their short-term funding and reassess the adequacy of their contingency funding plans.

In addition, the regulator called on firms to secure hedging instruments against the possibility of rising interest rates, move quickly to resolve troubled real estate project financing sites, and strengthen foreign-currency liquidity management.

The FSS particularly stressed the need for thorough management of foreign exchange and liquidity risk in light of the expanding volume of foreign-currency repurchase agreement sales and the potential for increased margin calls on equity-linked securities.

The chief risk officers who attended said they agreed on the need to move beyond mechanical, rules-based risk management and adopt a framework that takes overall market conditions into account.

They also shared the view that strengthening investor protection in a substantive rather than formalistic way is essential, and pledged to actively manage soundness and liquidity in preparation for further market volatility.

The FSS said it will continue to monitor trends in margin financing, unsettled trades and forced selling together with the Korea Financial Investment Association, and will intensify oversight to ensure that brokerages deliver meaningful risk management and investor protection in practice.


th5@heraldcorp.com