Korea’s regulator probes Kiwoom Securities on CFD-related stock crash

Kiwoom Securities Co. in Seoul [Photo by Yonhap]

South Korea’s financial regulator has launched an investigation into Kiwoom Securities Co. on Wednesday in connection with the suspected stock price manipulation scheme that is believed to be behind a recent sell-off triggered by contract for difference (CFD) trading by Societe Generale Securities.

According to sources from the financial sector, the Financial Services Commission and the Financial Supervisory Service unveiled plans to investigate Kiwoom and other major securities firms in connection with the recent stock market crash during a closed-door meeting with lawmakers on Tuesday.

During the meeting, financial authorities acknowledged their failure to detect abnormal transactions regarding the crash and vowed to improve their monitoring and detection systems. The authorities also said that the latest incident was not relevant to short selling as five of the eight stocks that plunged by their daily lower limit, have been banned from short selling since March 2020, according to the sources.

On April 28, the FSS had asked heads and executives of local brokerage firms to strengthen risk management of CFD accounts and several firms responded by ceasing new memberships and transactions through CFD accounts.

“Since CFD has become a problem in the latest stock market crash, we will look into CFD trading, and the FSC and the FSS will work together to improve related systems,” said an official from the financial authorities.

Under the plan, the FSS will look into whether the brokerage firms followed individual professional investor requirements and regulations related to CFD and whether their executives and employees were involved in the stock crash. They will also investigate whether DaouKiwoom Group’s chairman had any connections to the incident.

Financial authorities will also seek to improve the CFD trading system as the number of individual professional investors engaging in CFD trading is rapidly increasing every year as requirements were relaxed in November 2019, raising concerns about potential losses by those investors.

The financial authorities are expected to maintain the current 40 percent margin requirement, but strengthen the qualification requirements for individual professional investors or introduce the maturity date and balance disclosure of CFD accounts. If the authorities strengthen CFD-related regulations, they may suspend CFD investments by individual professional investors for a while.

At the end of February, 13 brokerage firms operate CFD services, with Kyobo Securities Co. having the largest balance at 613.1 billion won ($457.7 million), followed by Kiwoom Securities at 518.1 billion won, Meritz Securities Co. at 340.9 billion won and Hana Securities Co. at 339.4 billion won.

The balance of CFD transactions was 3.5 trillion won, up 52.5 percent from 2.3 trillion won at the end of last year. In February, CFD trading volume totaled 2.4 trillion won, up 9.3 percent from last year’s average monthly trading volume of 2.2 trillion won. At the end of February, the purchase position among the balance of CFD transactions was 3.3 trillion won, accounting for 93.7 percent of the total CFD trading balance.