The increase of Margin level and its effects on FX market in Korea

On December 1st, Korea Financial Services Commission (FSC) and Financial Supervisory Service (FSS) announced drastic measures on the FX margin product

On December 1st, Korea Financial Services Commission (FSC) and Financial Supervisory Service (FSS) announced drastic measures on the FX margin product for the purpose of leading a sound investment environment in the retail sector. The main point is to discourage individual trading by reducing leverage through increasing initial margin level to 10% from 5% and maintenance level to 5% from 3%.

Thus far, domestic broker industry of securities and futures firms held discussions and exchanged views several times with the financial supervisory authorities in order to relieve the shock of the regulation changes which would lead to a steep fall in FX trading volume and to voluntarily provide a sound investment climate. The authorities called the huge losses of FX trading investors into question and the industry pointed out that the current trade size of 100k is the source of the losses as the current trade size exposes investors to an excessive risk. Therefore, the industry made a recommendation that introducing 10k trade size allowing a small-scale investment for individuals who are not familiar to FX trading can reduce the risk of loss. However, authorities thought that such derivatives product trading, not only FX trading but also KOSPI Option and ELW trading, which many individuals trade, are causing social problems. Hence, authorities firmly introduced a plan to reduce the amount of individual investment by lowering the leverage that triggers speculation.

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The strong negative stance by the authorities toward the retail business has daunted the industry to actively engage in the business, leaving no choice but to inevitably accept the new regulation. Hence the industry concerns that the sharp shrinking of FX business would be unavoidable after March 5th, 2012 when the increase of margin level takes effect.

The ripple effects of the government’s December 1 announcement can be examined in two points of view between securities companies and futures companies. FX business is a small earning out of various revenue sources for the securities companies, whereas for the futures companies, the profit earned by FX business takes an important portion of total marketing revenue. So their action toward the announcement will be different.

Rest of the article is found in the latest Forex Magnates Quarterly Report.

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