South Korean brokerage firms, including Korea Investment & Securities and NH Investment & Securities, have temporarily halted or restricted new margin loan transactions amid escalating market volatility and record levels of investor debt. The moves, announced Thursday and Friday, are aimed at mitigating risks associated with a potential market downturn triggered by geopolitical tensions and a surge in leveraged trading.
Korea Investment & Securities suspended new margin loan and short selling transactions starting at 8:00 a.m. Local time on Thursday, according to a company statement. NH Investment & Securities followed suit on Friday, halting new margin loan transactions. Both firms cited concerns over potential losses from forced liquidations should market conditions worsen. The resumption date for these services remains undefined.
The actions reach as South Korea’s benchmark Kospi index experienced significant fluctuations this week, briefly triggering a circuit breaker on Thursday, coinciding with rising anxieties over the conflict in the Middle East. The combined margin loan balance across the industry has reached approximately 33 trillion won (approximately $24.3 billion USD), nearing the legal limit of 100% of the firms’ capital base, according to financial regulators and industry sources.
The restrictions are not limited to Korea Investment & Securities and NH Investment & Securities. KB Securities had previously attempted to ease restrictions on margin loans and collateralized lending on February 23rd, but reversed course two days later, reinstating the suspension. All three firms have also reduced the maximum margin loan limit per customer from 10 billion won to 5 billion won, and have suspended securities-backed loans.
The legal framework governing South Korean financial institutions limits the total amount of credit extension to 100% of a firm’s capital. Korea Investment & Securities, NH Investment & Securities, and KB Securities reported separate capital bases of 11.1623 trillion won, 8.6129 trillion won, and 6.6928 trillion won respectively, as of the end of the fourth quarter of last year. The rapid increase in margin loan balances has brought these firms close to breaching this regulatory ceiling.
The move to curtail margin lending is expected to impact individual investors heavily reliant on borrowed funds for trading. Concerns are mounting that the restrictions will limit their ability to “water down” losses in a falling market, potentially leading to increased forced liquidations. The total outstanding margin loan balance had already surpassed 30 trillion won for the first time on January 29th, and continued to climb rapidly in the following weeks, reaching 32.6689 trillion won by February 27th.
