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| Financial Services Commission (FSC) Vice Chairman Kim So-young speaks during a joint meeting to tighten regulations on CFD transactions at the Seoul government complex on Friday. Courtesy of FSC |
New retail investor CFD accounts prohibited for next 3 months
By Anna J. Park
The government has overhauled regulations on trading of contracts of differences (CFDs), a highly leveraged derivative product tied to the purchase and sale price differences of equities.
The move is aimed at strengthening requirements for trading to increase transparency and protect investors in order to prevent major stock price manipulation scams based on derivative trading, as seen in a recent high-profile stock manipulation case involving eight local stocks, which wreaked havoc on hundreds of retail investors.
According to the Financial Services Commission (FSC), the top financial regulator, on Monday, the government will raise the transparency of CFD trading in order to help investors grasp information on its transactional nature. The Financial Supervisory Service (FSS) and bourse operator Korea Exchange (KRX) jointly participated in drawing up the measures.
So far, CFD trading has been regarded as a de facto anonymous investment due to a lack of information disclosure on transactions. For instance, when a retail investor carries out CFD trading of stocks through a global-branded brokerage company, it would be marked as a transaction by a foreign investor. This could warp investors' judgment on the stocks, by artificially inflating the strength of foreign buying power on the particular stock.
This was a key part of the fraudulent scheme that resulted in a major plunge of eight stocks in late April, following massive sell-offs through SG Securities Korea, the local branch of the Societe Generale Group of France. When scammers bought the eight stocks using CFD transactions through the platform of the French securities firm, it was recorded as foreign buying, which resulted in distortions of foreign investors' preference for the stock, contributing to the buoying of stock prices during the early phases of the scam.
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| Ra Deok-yeon, a key suspect in a recent large-scale stock manipulation case, is brought to a court in Seoul to attend his arrest warrant hearing, May 11. Newsis |
Also, under the incumbent regulatory framework, investors cannot figure out the amount of CFD transactions that are facing imminent liquidation, unlike stocks' remaining credit balances which could be easily checked by investors.
"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," FSC Vice Chairman Kim So-young said.
The financial authorities will also strengthen qualifications of "individual professional investors" who are allowed to engage in CFD trading in the country. Retail investors must meet several qualifications to register as individual professional investors. So far, this registration process can be done online. Yet, the online procedure was misused by scammers, so the registration will now be done only at offline branches of securities firms. On top of that, qualifications to register as a professional investor will be much stricter.
New subscriptions to CFD trading accounts will be prohibited for the next three months, as the authorities plan to implement the necessary changes by August.
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