Authorities move to defuse the forced-selling bomb from “debt-financed investing”... waive collateral-ratio rules for three months

[Financial News] Financial authorities have decided to temporarily ease the rules on collateral maintenance ratios for margin loans to prevent a surge in forced liquidations following a sharp stock market downturn.
The Financial Supervisory Service and the Korea Financial Investment Association said on the 8th that securities firms would be exempt from the obligation to maintain collateral ratios on credit extended from the 9th through January 31 next year. The measure is part of the stock market stabilization measures discussed at an emergency joint meeting of relevant agencies to review market conditions on the 6th.
The measure is intended to prevent greater stock market volatility from forced selling by allowing securities firms to apply collateral maintenance ratios flexibly even when collateral values fall as stock prices decline.
Under the current Financial Investment Business Regulations, securities firms must secure collateral of at least 140% when extending margin loans. If an investor’s collateral ratio subsequently falls below the maintenance ratio set by the firm, it must demand additional collateral.
If an investor fails to provide the additional collateral by the deadline, the securities firm may forcibly sell the shares the investor holds. A flood of forced sales when stock prices plunge could set off a vicious cycle, driving prices even lower.
Under the measure, securities firms will be able to set collateral maintenance ratios flexibly, taking into account investors’ creditworthiness and market conditions.
The Financial Supervisory Service plans to closely monitor market conditions and work with relevant agencies to help ease stock market volatility. The Korea Financial Investment Association plans to continue monitoring implementation of the “Plan to Strengthen Self-Regulation of Margin Lending,” drawn up on September 23, to ensure it is fully carried out.

[email protected] Seo Min-ji Reporter