Margin trading in the crosshairs to curb losses

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Margin trading in the crosshairs to curb losses

Korea’s financial watchdog said yesterday it is mulling a set of measures to limit retail investors’ trading of derivatives in a bid to keep them from suffering heavy losses.

Currency margin trading is viewed as one of the riskiest derivatives for retail investors as losses from their excessive bets on currency volatility have increased, prompting the financial watchdog to study steps to curb it.

Margin trading allows investors to place heavy bets on currency volatilities with a relatively small amount of money. Currency margin trading can yield huge profits, but it can also inflict huge losses on investors if wrongfully bet.

The financial watchdog said it is considering pushing brokers like securities or futures firms to sufficiently notify individual investors of investment risks.

Whether to restrict a new entry into the FX margin trading market is also being studied, according to officials.

“The regulator is considering measures over how to overhaul the derivatives markets as retail investors are suffering from major losses,” said an official at the Financial Services Commission. “The watchdog is expected to announce stricter steps within this year.”

In July 2009, the FSC imposed tougher regulations on FX margin trading by raising the value of collateral, but currency volatility, increased by the global financial crisis, has made more retail investors place excessive bets on derivative trading, exposing themselves to highly speculative trading.

According to the FSC, about 90 percent of retail investors are estimated to have inflicted losses from currency margin trading.

Currently, six futures companies and 18 securities firms are brokering currency margin trading services with foreign dealers and local investors.

The financial watchdog said retail investors are estimated to have lost 33 billion won ($29.3 million) in the first half of this year, after their losses reached 76.5 billion won in 2009 and 58.9 billion won in 2010.

The value of currency margin trading contracts reached $492.4 billion in 2008, sharply up from $76.5 billion seen in 2007, data showed. It amounted to $495.6 billion and $463.8 billion in 2009 and 2010, respectively.


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