South Korea CFD brokers halt new accounts amid regulatory clampdown
South Korea financial industry regulatory body Financial Services Commission (FSC) has announced that it will be taking steps towards “stamping out unfair trading activities in capital markets”, which will include looking at the rules and regulations surrounding CFD (contracts for difference) trading.
CFD brokerage and trading is very active in South Korea, with the country’s mainly-domestic CFD brokers holding an estimated 3.5 trillion won (USD $2.6 billion) in client assets.
The regulator’s announcement came after a stock price manipulation scam was unveiled last month on the South Korea exchange KRX, in which the shares of a number of leading companies (including Samchully, Daesung Holdings and Daou Data) were manipulated via high-leveraged CFD trading.
In the aftermath of the scandal a number of leading South Korean CFD brokers including Samsung Securities, Korea Investment, Shinhan Investment, and DB Financial have halted the opening of new CFD accounts, and limited existing clients’ ability to trade CFDs on certain instruments.
The South Korea FSC said it is still investigating the matter alongside government regulatory body Financial Supervisory Service (FSS) and the KRX.
However the FSC was quick to point out that it already expects to seek regulatory improvements in the current CFD trading system on a separate track from the ongoing investigation. The improvement measures will likely include:
(a) providing more accurate investment information to investors,
(b) resolving regulatory arbitrages vis-à-vis credit financing (i.e. CFD leverage),
(c) strengthening the application and confirmation process for qualified professional investors, and
(d) bolstering requirements for OTC transactions such as CFDs by qualified professional investors.
The authorities said that they plan to finalize the details of these measures, and announce them within one month.
In addition, the FSC said that it will strengthen punishment on unfair trading activities in capital markets. Currently, illicit activities are handled with criminal penalties, but they usually take a long time to reach a court decision and there are limits in collecting unfairly gained profits.
A revision bill of the Financial Investment Services and Capital Markets Act (FSCMA) addressing these issues is currently under committee review at the National Assembly. The measures include imposing a penalty surcharge of up to twice the amount of unfairly gained profits, banning all capital market transactions for a maximum ten years, and prohibiting violators from serving as an executive of a listed company. In addition to this, authorities will also review ways to freeze suspicious accounts deemed to be involved in stock price manipulation.
We will continue to follow this story as it develops.