As volatility in Korea's stock market widened, the Financial Supervisory Service convened chief risk officers (CROs) from major securities firms and asked them to pay close attention to the credit financing risks of retail investors and to thoroughly strengthen the firms' own liquidity management.
On the 24th, the Financial Supervisory Service said it held a "meeting to strengthen securities firms' risk management and protect investors" together with the Korea Financial Investment Association, chaired by Vice Governor for the Capital Markets Division Seo Jae-wan, with CROs of major securities firms in attendance.
The Financial Supervisory Service (FSS) on the day asked firms to take special care with related risk management as margin lending and failed-settlement transactions are rising rapidly. The average daily balance of margin lending has steadily increased from 2.09 trillion won last year to 3.63 trillion won in May this year. The average daily balance of receivables also surged over the same period from 900 billion won to 1.4 trillion won.
Specifically, it asked firms to strengthen risk guidance so that investors can fully understand the structure of margin lending and failed-settlement transactions and the risk of forced liquidation. It asked them to explain more simply and clearly the conditions that trigger forced liquidation, the expected loss range, and key cautions when investing, and to faithfully fulfill the duty to explain terms and prospectuses.
It also requested that securities firms reinforce their own soundness and liquidity management in preparation for a situation in which market volatility in stock prices, interest rates, and exchange rates is expanding. It noted that, as the scale of stock transaction increases has expanded the need for short-term liquidity funding, there is a need to reexamine the adequacy of contingency funding plans (Contingency Funding Plan).
It emphasized the need to enhance loss-absorbing capacity by, among other measures, early write-downs for troubled business sites in domestic and overseas real estate project financing (PF) to prepare for interest rate hikes. It also asked firms to strengthen foreign-currency liquidity management systems in preparation for sharp fluctuations in the value of foreign-currency assets and liabilities and the potential expansion of margin calls related to equity-linked securities (ELS).