As the U.S. stock market wobbles due to erratic tariff policies, domestic investors who borrowed money using U.S. stocks as collateral are increasingly sighing. Unlike in Korea, where daily stock price fluctuations are limited to ±30%, there are no such safety measures in the U.S., meaning stock prices can plummet overnight. In this case, forced liquidation can happen immediately, resulting in significant losses. The possibility of being subject to forced liquidation overnight is also a concern.
In addition, those investing in U.S. stocks need to consider the won-dollar exchange rate. Overseas mortgage loans are not in foreign currency but in won, exposing them to the risk of exchange rate fluctuations until the payment is made. Furthermore, if stock prices fall along with the exchange rate, the value of the collateral declines accordingly.
Most securities firms are currently operating overseas stock mortgage loan (stock-backed loan) criteria in line with domestic standards. After evaluating the quality of corporations and transaction volumes, they apply different collateral maintenance ratios from the highest to the lowest grades. If the value of the collateral falls below a certain ratio compared to the borrowed amount, the securities firm will demand additional payment from the investor. If the investor does not provide additional funds, the securities firm will execute forced liquidation of the stocks regardless of the investor's wishes.
Mirae Asset Securities categorizes stocks into groups A to F and applies a collateral maintenance ratio of 140% to 165%. For instance, if someone borrows 1 million won using overseas stocks in group A as collateral, the risk of forced liquidation increases if the value of the pledged stocks drops below 1.4 million won. If the same amount is borrowed while pledging overseas stocks in group F, the threshold for forced liquidation is 1.65 million won. Korea Investment & Securities classifies stocks into grades S to B, applying a collateral maintenance ratio of 150% to 170%.
The problem is that due to comments from President Trump, U.S. stock prices can fluctuate wildly, potentially leading to a situation where the collateral ratio cannot be maintained. While domestic stocks have a daily price fluctuation limit of ±30%, there are no such restrictions in the U.S. Stocks can become worthless overnight due to unlimited rises or drops. The regular U.S. stock market starts at 11:30 p.m. Korean time, making it difficult to respond promptly even if stock prices plummet.
Tesla, the American stock that domestic investors have purchased the most, is experiencing greater price volatility due to CEO Elon Musk's deep connections with President Trump. On the 26th of last month, Tesla's stock fell by 8.39%, dropping its market capitalization below $1 trillion.
On the 27th of the same month (local time), President Trump announced that an additional 25% tariff would be imposed on Canada and Mexico and 10% on China, leading to a 3.04% decline in Tesla's stock. It also plummeted by 4.43% on the 4th of this month. Steve Mann, the chief analyst at Bloomberg Intelligence, noted, "Tesla is facing controversies related to Elon Musk." This means that since Musk has publicly revealed his political inclinations, the stock price reacts more sensitively to minor negative news.
The situations of Nvidia, Microsoft, and Palantir Technologies, which are widely held by domestic investors, are similar. Nvidia has fallen by 7.08% in the past month, while Microsoft dropped by 5.97%, and Palantir Technologies saw a decline of 16.73%.
If stock prices fall further, investors who borrowed money using these stocks as collateral must inject more funds to maintain the collateral maintenance ratio.
If the won-dollar exchange rate rises, it may be somewhat easier to meet the collateral ratio, but expecting this is difficult. When valuing the overseas stocks pledged by clients, securities firms evaluate them in won. This means that the exchange rate is an added factor when calculating the collateral value of overseas stocks.
Securities firms evaluate the value daily using the initial foreign currency exchange rate to prepare for the possibility of not being able to recover loans. Thus, as the exchange rate rises, the evaluation of collateral value becomes more favorable. In the past month, the won-dollar exchange rate increased by 0.75%. Given the drop in major U.S. stocks, this figure is ridiculous for the aim of increasing collateral value.
An official from the financial investment industry noted, "Investors should be cautious when obtaining stock-backed loans if overseas stocks fluctuate wildly."