South Korea’s financial market regulators are introducing heavy regulations to contracts for differences (CFDs) trading to make the sector transparent and prevent market manipulations, several local news outlets reported.

A Hit in the CFDs Trading Market

The official announcement on Monday came a month after eight South Korean stocks hit the daily lower limit for almost a week due to the effects of CFDs trading, which are leveraged derivatives products. The CFDs accounts were liquidated, resulting in losses of more than 100 billion won ($77 million).

The measures were jointly announced by the country’s top financial market regulator, the Financial Services Commission (FSC), the Financial Supervisory Service (FSS), Korea Exchange, and the Korea Financial Investment Association.

New Regulations

One of the key new measures is to clarify the entities trading CFDs.

Under the current rules, retail investors are categorized as institutions (if the transactions are processed by a local broker) and foreign investors (if processed by a foreign broker). These rules create confusion around the origin of the investments.

“The financial authorities will overhaul regulations on CFD trading so that investors can correctly identify information about the transactions ― such as who the real investors of the CFD trading are and how high the liquidation risks that these CFD transactions bear are ― and they will be able to make prudent investment decisions,” said Kim So-young, the Vice Chairman of the FSC.

Further, the South Korean authorities want to make the criteria to qualify as a professional investor more stringent. Moreover, brokers will need to verify the qualification of professional investors every two years.

Other regulations include mandatory face-to-face authentication while opening new CFDs accounts. Previously, the authentication could be done online without any face-to-face verification.

Temporary Suspension of CFDs Trading

Meanwhile, the South Korean regulator recommended restricting CFDs trading and account opening in the country for the next three months until the new regulations come into effect.

Many local brokers already prohibited customers from opening new accounts from the end of April, when the controversy around CFDs trading was exposed.

The regulations came following an inspection of several CFDs brokers by the FSS, which found that some brokers opened CFDs account without any identification verification. Further, some brokers ran misleading advertisements for risky investment instruments.

The FSS is now investigating a brokerage executive and will expand the scope of the investigation if necessary.

“Trust in the capital market has been harmed, and investment sentiment has withered from the recent unfair transactions,” Kim added. “The government and the related institutions feel major responsibility and will quickly and strictly resolve the problems raised.”