Korean securities firms move to halt investors’ losses from CFD sell-off

Yeouido Financial district in Seoul [Photo by MK DB]

Several Korean securities firms have ceased new memberships and transactions through contract for difference (CFD) accounts, suspected to be behind a recent sell-off that sent eight stocks to their daily lower limit for days.

Samsung Securities Co. Friday announced a temporary halt to new subscriptions for domestic and overseas CFD services. Korea Investment & Securities Co. will halt all new CFD trading from May 1, except for clearing trades for customers who already hold a balance.

Shinhan Securities Co. and DB Financial Investment Co. ceased trading on the eight stocks, which include Samchully Co., Sunkwang Co. and Daou Data Corp. Meritz Securities Co. will continue to operate CFD services, but with caution.

Meanwhile, NH Investment & Securities Co. and Hana Securities Co. said they will not take any action as the volume of their CFD trading is not significant.

The Financial Supervisory Service asked heads and executives of 35 local on Friday to strengthen risk management of CFD accounts. These measures are seen as a pre-emptive action on mounting criticism of CFD trading, which is one of the factors that contributed to the massive sell-off.

Funds in CFD accounts reached 3.5 trillion won ($2.61 billion) at the end of February, 52 percent more than the 1.2 trillion won at the end of last year, according to data from the financial watchdog.

CFDs are over-the-counter derivatives designed to settle the difference between the entry price and exit price of an underlying asset in cash without owning the actual stock. Trading with a maximum 2.5 times leverage is allowed, but if a specified margin rate is not maintained, forced liquidation will occur through reverse trading.

There is a risk that CFDs could be used for unfair trading, such as stock price manipulation, because investors are not known to the public due to the product structure and for creating an illusion of active stock trading through a foreign securities company. They can also trigger additional countertrading in a down market, causing the market itself to fluctuate heavily.