Financial authorities introduce stricter measures to regulate CFD trades

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Financial authorities introduce stricter measures to regulate CFD trades

Financial Services Commission Vice Chairman Kim So-young speaks at the government complex in central Seoul on Thursday. [NEWS1]

Financial Services Commission Vice Chairman Kim So-young speaks at the government complex in central Seoul on Thursday. [NEWS1]

 
Financial regulators announced a set of measures to tighten regulations on trading of an equity derivative that caused a handful of stocks to crash last month.
 
The announcement arrived a month after eight stocks reached the lower daily trading limit for almost a week in April due to the trading of contracts for differences (CFDs), a type of leveraged trading on the price movement of equities without owning them.
 
The stocks plunged after CFD accounts were liquidated, causing a loss of more than 100 billion won ($77 million).
 
In a joint statement Friday, the Financial Services Commission (FSC), the Financial Supervisory Service (FSS), Korea Exchange and the Korea Financial Investment Association announced a set of measures to improve the trading system for the CFDs.
 
The changes include clarifying the entities trading the derivative product.
 
Currently, retail investors are marked as institutions if CFDs are processed through domestic brokerages and foreign if done by foreign brokerages.
 
This has created confusion about where the investment is actually coming from.
 
The authorities plan to make it clear who is trading these derivatives and let investors know the volume of the leverage investments.
 
People will be able to "invest after a clear understanding of who the market participants are, the impacts of CFDs trading and its liquidation," FSC Vice Chairman Kim So-young said in a statement.
 
The authorities will also make it more difficult for individuals to become professional investors, a requirement to trade CFDs.
 
The identity verification to open CFD accounts will now require face-to-face authentication, moving away from the previous online, no face-to-face confirmation.
 
Brokers will now be required to verify whether they comply with the requirements to be professional investors every two years.
 
The financial regulators will recommend the restriction of CFD trading over the next three months until their measures are implemented.
 
"Trust in the capital market has been harmed, and investment sentiment has withered from the recent unfair transactions," Kim said. "The government and the related institutions feel major responsibility and will quickly and strictly resolve the problems raised."  
 
Kim added the authorities will cultivate a sound investment culture.
 
Following the stock crash, the FSS launched an inspection on brokerages selling CFDs, including Kiwoom Securities, in early May.
 
The FSS has found some brokerages allowed investors to open CFD accounts online without properly confirming one's identification. The regulator also found that brokerages ran misleading advertisements on CFD and made them sound less risky than they were.
 
The FSS said it is investigating a brokerage executive that handled CFD over breach of duty and will expand the inspection if necessary.
 
The regulator plans to complete the inspection in June.   

BY JIN MIN-JI [jin.minji@joongang.co.kr]
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