Korea Exchange (KRX) said it would scrap the requirement to collect 100% of the initial margin in cash when designating an investment warning or investment risk stock. Until now, to buy a stock designated as an investment warning or investment risk, investors had to pay the entire margin in cash for the transaction to proceed.
According to the exchange's legal portal on the 24th, the exchange gave notice of revisions to the business regulations for the KOSPI, KOSDAQ and KONEX markets that include this change. The main point is to exempt the obligation to collect 100% of the initial margin for stocks designated under the market alert system.
The initial margin is a deposit that investors place with a securities firm when buying stocks. Mandating 100% in cash was intended to block margin transactions at the source.
If the rule is revised, margin transactions are expected to become possible even when investing in stocks designated as investment warning or investment risk in the KOSPI, KOSDAQ and KONEX markets.
An exchange official said, "We are improving regulations related to initial margin to foster an advanced capital market environment in line with global standards by rationalizing regulations tied to the market alert system."
Earlier, in Dec. last year, as the domestic stock market surged, a mishap occurred in which blue chips on the KOSPI, including SK hynix, were successively designated as investment warning stocks.
In fact, cases designated as market alert stocks are also soaring this year. From Jan. 1 to Apr. 24 this year, 376 stocks in the KOSPI were designated as investment caution, investment risk or investment warning. That was a 135% surge from last year's 160. The KOSDAQ likewise rose 118%, from 698 last year to 1,523 this year.
After SK hynix was designated as an investment warning stock last year, the exchange believed improvements to the market alert system were needed and has been reviewing reforms. It said easing the 100% initial margin requirement is part of that effort.
However, there is considerable concern about uniformly easing the 100% initial margin requirement not only for the KOSPI but also for the KOSDAQ. Because the KOSDAQ has many small-cap stocks, price volatility is high and investment risk can be greater than for companies listed on the KOSPI.
In response, the exchange noted that for stocks deemed highly risky, securities firms can set higher initial margins on their own, and sanctions such as bans on margin trading or disallowing substitute collateral securities remain in place. The intent is to ease regulations while leaving brokers' autonomous risk management framework intact.
An exchange official said, "While some rules on stocks designated under the market alert system are imposed by the exchange, securities firms are already collecting initial margins at higher rates for risky stocks on their own."
Meanwhile, the exchange will collect opinions on the rule revision through the 30th. The effective date has not been set, but it could take effect as early as May.