Contract for difference-sparked selling partly behind massive foreign selling in Korea

[Graphics by Song Ji-yoon]

Skilled institutional investors betting on a bear run are suspected to be partly behind the merciless foreign selloff in South Korean stock markets in the biggest downward spiral since the onset of the Covid-19 pandemic in the spring of 2000.

As of Tuesday, foreigners net sold 5.5 trillion won ($4.2 billion) worth of Kospi and Kosdaq shares this month or 19.1 trillion won so far in the year.

The flight has not just been triggered by bias towards U.S. dollar assets from strong greenback and higher interest rates, but also by derivatives leveraging means dubbed contract for differences (CFD), similar to margin investment in stocks, but without having to own underlying shares.

The sophisticated means of trade is allowed to institutions based in Korea, where they can short on shares without having to own the shares.

The minimum margin was initially 10 percent but the financial authority raised the level to 40 percent after a big margin call mess of Archegos Capital Management founded by Korean-American Wall Street investor Bill Hwang last year. Leverage is now possible at 2.5 times the stock value compared with the past 10 times.

The margin call volume is counted as foreign offering instead of domestic selling as the trade must go through foreign brokers based in Korea.

According to a recent report on capital market risk analysis by the Financial Supervisory Service, CFD balance surged 13.1 percent to 5..4 trillion won as of the end of 2021 from 4.8 trillion won a year ago. CFD coverings were mainly targeted Kakao Corp. (115.9 billion won), Celltrion (48 billion won), and Kumho Petrochemical (35.2 billion won).

“CFD trading may carry more investment losses as to ordinary stock investment due to leverage in times of increased stock price volatility,” said an unnamed official from the FSS. “We will seek additional risk management measures on possible rise in market volatility and CFD investment losses of individuals when CFD market overheats.”

[ⓒ Maeil Business Newspaper & mk.co.kr, All rights reserved]