Stock liquidation surges in Korea amid curbs on consumer loans, stock price fall

Forced sale by Korean brokerages in borrowed shares have surged amid curbs on consumer loans and stock price falls.

According to the Financial Supervisory Service (FSS) on Monday, the outstanding balance in margin accounts reached 25.7 trillion won ($21.7 billion) as of Sept. 13, growing almost four times from 6.6 trillion won at the end of March.

The daily volume of forced liquidations of stocks held by leveraged margin accounts averaged 8.48 billion won in August, nearly doubling from 4.21 billion won in the previous month.

Investors can borrow money from securities companies to buy stocks after putting down 30 percent of the transaction as deposits and must pay back the debt within two days. If the margin investor fails to repay it when a margin call is issued, the investor should post additional collateral or the broker forcefully liquidates the account to prevent losses.

The FSS has raised alarm that the growing margin investment when stock prices plunge could boost the volume of forced liquidations and further push stock prices down.

The authority also advised against margin investments because the stricter loan regulations and interest rate hikes could make it difficult for investors to take out loans to place additional collateral.

“Investors need to be very careful and recognize the high risks of margin trading as the stock market volatility is expected to heighten,” said Yoon Hyung-joon, the head of financial product analysis team at the FSS. “We will step up our monitoring on the situation and take extra measures if necessary,” he added.

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