South Korea Delays Margin Liquidations Amid Market Slump
In preparation for the possibility that debt-driven retail investors could be driven into mass forced liquidation due to the recent plunge in the KOSPI, financial authorities have decided to exempt securities firms from their obligation to maintain credit loan collateral ratios for three months star
The South Korean government has temporarily exempted securities firms from maintaining credit loan collateral ratios for three months, starting on November 9, in an effort to prevent forced liquidation of debt-driven retail investors amidst the recent market slump. However, critics argue this could exacerbate the risk of a "leverage bomb," as falling stock prices may lead to greater forced liquidations.
Authorized credit loan collateral ratios must typically be 140% or higher; when they fall below this, investors must add collateral to securities firms or face forced liquidation of stocks. The Korean stock market (KOSPI) has plummeted 13.6% since the beginning of November, falling below 5,000 points on November 6 before stabilizing.
The government's decision aims to avert a vicious cycle of forced sell-offs that could further depress stock prices. As of November 5, credit loan balances amount to 28.7715 trillion won. Post-measure, banks like Mirae Asset Securities, KB Securities, and NH Investment & Securities have reduced collateral ratios for domestic stocks to 130%.
This allows leverage investors to postpone the burden of forced liquidation. However, the effectiveness of this move is being questioned, as the KOSPI slipped 0.8% on the day, failing to recover. A securities firm official contends the policy only delays, rather than resolves, investment risk, warning that further market declines might still result in forced liquidations for leveraged investors.
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