South Korea Reintroduces CFDs Trading after $77M Stock Scandal

<p>Four months
after contracts for difference (CFDs) caused significant controversy in the
South Korean market and led to a sharp reaction from the local regulator, most
domestic brokerage houses are set to resume CFDs trading starting in September. This
decision comes after the suspension of such trading activities in April, due to
concerns about stock manipulators exploiting vulnerabilities.</p><p>CFDs Instruments Return to
South Korea</p><p>The
suspension in April was primarily in response to the risky trading of CFDs,
where stock manipulators found a loophole. This resulted in a rapid decline in
the valuation of eight listed shares, marking them as scandal victims.</p><p>CFDs trading
caused eight <a href="https://www.financemagnates.com/tag/south-korea/" target="_blank" rel="follow">South Korean</a> companies to hit their daily lower limit for nearly a
week. Leveraged accounts were removed, leading to losses amounting to $77
million.</p><p>A month
later, local market regulators, including the Financial Services Commission
(FSC), the Financial Supervisory Service (FSS), Korea <a href="https://www.financemagnates.com/terms/e/exchange/">Exchange</a>, and the Korea
Financial Investment Association, <a href="https://www.financemagnates.com/forex/south-korea-brings-tight-cfds-trading-regulations/" target="_blank" rel="follow">jointly decided</a> to implement very strict
regulations for the sector. Their aim was to make it more transparent and
prevent similar manipulations in the future.</p><p>Once the
dust from the scandal settled and firms adjusted their offerings to comply with
the new regulations, CFDs trading in the country is expected to resume soon. The
majority of securities firms are poised to reintroduce CFDs trading.
Intriguingly, SK Securities is the only firm that has vowed to stop offering this service altogether.</p><p>Conversely,
a consortium of nine out of 13 firms, which includes prominent local names like
Meritz Securities, Shinhan Securities, and Kyobo Securities, have chosen to
enhance their services. However, some significant players remain undecided, including Korea Investment &amp; Securities, Samsung Securities, and Yuanta Securities.</p><p>According
to the Korea Times, the general consensus is leaning towards resumption,
primarily as a strategy to diversify revenue sources, especially given the
current lukewarm stock market atmosphere.</p><p>Traders are eagerly awaiting the return of the opportunity to trade on CFDs. Especially since <a href="https://www.financemagnates.com/forex/analysis/analysis-forex-traders-from-south-korea-top-the-rankings/" target="_blank" rel="follow">historical data shows</a> that customers from South Korea are among the most active, making the highest number of transactions in a month.</p><p>What Do the New
Regulations Entail?</p><p>In the
past, retail investors were labeled either as institutions when their
transactions were managed by a local broker or as foreign investors when
facilitated by an overseas broker. This classification system led to
uncertainty about where the investments originated from.</p><p>“The financial authorities will overhaul regulations on CFD trading so that
investors can correctly identify information about the transactions ― such as
who the real investors of the CFD trading are and how high the liquidation
risks that these CFD transactions bear are ― and they will be able to make
prudent investment decisions,” said Kim So-young, the Vice Chairman of the FSC.</p><p>The South Korean government also intends to tighten the requirements for being
recognized as a professional investor. On top of that, brokers will be tasked
with ensuring the eligibility of professional investors biennially.</p><p>New
regulations now necessitate in-person verification to initiate new
CFDs accounts, which is a departure from the previous practice where online
authentication sufficed without any direct interaction.</p><p>In the
meantime, South Korea has <a href="https://www.financemagnates.com/institutional-forex/foreign-traders-gain-easier-access-to-south-korea-after-30-years-cfds-not-included/" target="_blank" rel="follow">changed regulations</a> that had been in place for thirty
years, which had strongly blocked foreign investors' access to the local
market. With the changes, access to locally listed stocks and bonds has been
made much easier. However, the CFDs industry has not been affected by the
changes.</p>

This article was written by Damian Chmiel at www.financemagnates.com.