Four months after contracts for difference (CFDs) caused significant controversy in the South Korean market and led to a sharp reaction from the local regulator, most domestic brokerage houses are set to resume CFDs trading starting in September. This decision comes after the suspension of such trading activities in April, due to concerns about stock manipulators exploiting vulnerabilities.
CFDs Instruments Return to South Korea
The suspension in April was primarily in response to the risky trading of CFDs, where stock manipulators found a loophole. This resulted in a rapid decline in the valuation of eight listed shares, marking them as scandal victims.
CFDs trading caused eight South Korean companies to hit their daily lower limit for nearly a week. Leveraged accounts were removed, leading to losses amounting to $77 million.
A month later, local market regulators, including the Financial Services Commission (FSC), the Financial Supervisory Service (FSS), Korea Exchange , and the Korea Financial Investment Association, jointly decided to implement very strict regulations for the sector. Their aim was to make it more transparent and prevent similar manipulations in the future.
Once the dust from the scandal settled and firms adjusted their offerings to comply with the new regulations, CFDs trading in the country is expected to resume soon. The majority of securities firms are poised to reintroduce CFDs trading. Intriguingly, SK Securities is the only firm that has vowed to stop offering this service altogether.
Conversely, a consortium of nine out of 13 firms, which includes prominent local names like Meritz Securities, Shinhan Securities, and Kyobo Securities, have chosen to enhance their services. However, some significant players remain undecided, including Korea Investment & Securities, Samsung Securities, and Yuanta Securities.
According to the Korea Times, the general consensus is leaning towards resumption, primarily as a strategy to diversify revenue sources, especially given the current lukewarm stock market atmosphere.
Traders are eagerly awaiting the return of the opportunity to trade on CFDs. Especially since historical data shows that customers from South Korea are among the most active, making the highest number of transactions in a month.
What Do the New Regulations Entail?
In the past, retail investors were labeled either as institutions when their transactions were managed by a local broker or as foreign investors when facilitated by an overseas broker. This classification system led to uncertainty about where the investments originated from.
“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.
The South Korean government also intends to tighten the requirements for being recognized as a professional investor. On top of that, brokers will be tasked with ensuring the eligibility of professional investors biennially.
New regulations now necessitate in-person verification to initiate new CFDs accounts, which is a departure from the previous practice where online authentication sufficed without any direct interaction.
In the meantime, South Korea has changed regulations that had been in place for thirty years, which had strongly blocked foreign investors' access to the local market. With the changes, access to locally listed stocks and bonds has been made much easier. However, the CFDs industry has not been affected by the changes.
