Concerns grow over a rise in forced liquidation in Korea amid SVB fallout

2023. 3. 16. 12:39
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Silicon Valley Bank in California, U.S. [Photo by Yonhap]
Concerns are rising in the South Korean stock markets as they are poised to see an increase in forced margin liquidation amid the bearish trend following the collapse of small regional banks in the U.S. including the Silicon Valley Bank (SVB).

According to multiple sources from the financial investment industry on Thursday, the number of stock trading accounts that failed to meet their collateral ratio at the country’s five securities firms reached 8,800 as of Tuesday, about 4.7 times larger than 1,887 at the beginning of March. Brokerages have been seeing the number of such accounts with default positions grow by two to five times since early March.

The number of accounts is projected to be even bigger given that the figures of Mirae Asset Securities Co. and Kiwoom Securities Co. have been excluded from the data.

Mirae Asset and Kiwoom each had 11 trillion won ($8.4 billion) and 4 trillion won in capital at the end of September 2022. The credit limit for major security firms with 3 trillion won or more in capital is 200 percent of their capital.

Individual investors that traded on credit are expected to face forced liquidation by the brokerage houses if they fail to pay for their stocks.

Securities firms tend to proceed with forced margin liquidation at lower-than-market prices two days after the accounts fail to meet the collateral ratio which is usually set at 140 percent.

Industry insiders noted that the forced margin liquidation can increase on Thursday which is two days after the Kospi and Kosdaq plunged 2.56 percent and 3.91 percent each following the SVB collapse.

According to the Korea Financial Investment Association, the amount of forced liquidation reached 30.1 billion won on Monday, accounting for 12.5 percent of the accounts receivable from consignment sales. On Tuesday, the amount fell slightly to 26.8 billion won but it is still higher than the 12.5 billion won seen at the end of February. The ratio was also higher at 9 percent, up from 6.6 percent seen earlier in the month.

The balance of margin transaction reached 18.2 trillion won as of Tuesday, up from the 16 trillion won range last month.

“An increase in the forced margin liquidation stocks tend to lead to a decline in the stock prices,” said an analyst at the Korea Investment & Securities Co. “Investors should closely monitor the developments of macro-economy issues as they have a bigger impact on the overall stock market for now.”

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