Changes in South Korea's Trading Rules

South Korean financial market regulators are set to introduce comprehensive regulations for contracts for differences (CFDs) trading to ensure transparency and prevent market manipulations, according to reports from various local news outlets. The official announcement comes after eight South Korean stocks experienced continuous declines for nearly a week due to the effects of CFDs trading, resulting in losses exceeding 100 billion won ($77 million) as CFDs accounts were liquidated. The Financial Services Commission (FSC), the Financial Supervisory Service (FSS), Korea Exchange, and the Korea Financial Investment Association have jointly unveiled these measures.

In the current regulatory framework, retail investors are categorized as either institutions if their transactions are processed by a local broker, or foreign investors if handled by a foreign broker, leading to confusion regarding the origin of investments. To address this, Kim So-young, Vice Chairman of the FSC, stated that the financial authorities will revamp CFD trading regulations, aiming to provide investors with accurate information about transactions, including the identification of real investors involved and the level of associated liquidation risks. This transparency will enable investors to make informed and prudent investment decisions.

The South Korean authorities also aim to raise the standards for qualifying as a professional investor, making the criteria more stringent. Additionally, brokers will be required to verify the qualification of professional investors every two years. Furthermore, new regulations will mandate face-to-face authentication for opening CFDs accounts, replacing the previous online authentication method without in-person verification.

Meanwhile, the regulators have recommended temporarily restricting CFDs trading and account opening in the country until the new regulations come into effect. Many local brokers have already halted customers from opening new accounts since the end of April, following the controversy surrounding CFDs trading. The FSS conducted inspections on several CFDs brokers, uncovering cases where accounts were opened without proper identification verification and brokers engaged in misleading advertisements for risky investment instruments. The investigation by the FSS is ongoing, including an examination of a brokerage executive, with plans to expand the scope if necessary.

Kim emphasized that recent unfair transactions have damaged trust in the capital market and dampened investment sentiment. The government and relevant institutions acknowledge their significant responsibility and are committed to swiftly and rigorously resolving the issues at hand, aiming to restore trust and rectify the problems that have arisen.