The Financial Supervisory Service said on the 23rd that, due to recent sharp swings in the domestic stock market, the risk of forced selling for investors using margin financing has increased, and related dispute complaints have been steadily filed. The Financial Supervisory Service organized key dispute cases and provided guidance on what investors should note.
First, forced selling is notified in advance by the method the customer designates. Before executing forced selling, the securities firm asks the customer to make an additional payment for the collateral shortfall using the method designated at the time of the margin agreement—phone, email, or alert message. If the notified communication is missed, forced selling may be executed because the additional payment deadline is not met.
For example, an investor filed a complaint with the Financial Supervisory Service alleging that the contracted securities firm failed to follow the advance notification procedure before forced selling, but it turned out the investor had blocked the firm's phone number and therefore did not receive the notices.
Also, during forced selling, the quantity is calculated based on a price discounted by a certain ratio (15%–30%) from the reference price such as the previous day's closing price, under the margin trading terms and conditions. In this case, depending on each firm's discount ratio, all shares of the targeted issue for forced selling may be sold regardless of the amount of the collateral shortfall.
Whether the collateral ratio is met should be checked after the market closes. This is because the stock price fluctuates during trading hours and the collateral ratio changes in real time.
In the past, there was a complaint that forced selling was executed even though the maintenance collateral ratio (140%) was met by selling shares purchased with intraday margin financing. It turned out that immediately after the sell repayment, the collateral ratio temporarily exceeded 140%, but as the stock price later fell, the final collateral ratio dropped below 140%, triggering forced selling.
Before forced selling is executed, investors can request a change of issue. The order for selecting the issue subject to forced selling among multiple margin-financed issues is predesignated under the securities firm's margin trading terms and conditions, but if a request is made by the time set in the terms, forced selling of a specific issue can be prevented depending on the level of the collateral shortfall.
In particular, investors should note that losses from forced selling are a realization of existing losses due to stock price fluctuations. The Financial Supervisory Service said, "A stock price rise immediately after forced selling is merely a result that appears afterward, so the forced selling itself cannot be deemed the cause of the loss."
In addition, caution is needed because buying overseas stocks can lower the collateral ratio and lead to forced selling. In the past, a securities firm mistakenly advised an investor to sell domestic stocks and buy overseas stocks for the same amount, which reduced the investor's collateral ratio. Some overseas stocks, unlike domestic stocks, have no price limits, so the collateral ratio is generally set conservatively.
If unpaid balances are not repaid, it can be unfavorable for margin trading, and investors should be aware that the way margin financing interest rates are charged can differ by securities firm.
If margin financing interest is charged retroactively over the entire period, the interest expense can be higher than applying different rates by period. Some securities firms charge higher margin financing interest rates on non-face-to-face (online) accounts than on branch-opened accounts.
The Financial Supervisory Service plans to continue providing timely guidance on dispute cases related to financial investment products and on points investors should note. An official at the Financial Supervisory Service said, "If necessary, we will strengthen investor protection through system improvements."