The mandatory 140 percent collateral ratio for securities firms' margin loans will be temporarily waived for three months starting Nov. 9. Investors who borrowed money from securities firms to buy stocks will not face forced selling even if the value of their collateral falls below the required ratio.
The move is aimed at preventing a wave of margin calls and forced stock sales amid a sharp decline in the KOSPI, which could trigger further selling pressure.
According to financial authorities on Nov. 6, the Financial Supervisory Service is expected to issue a no-action letter on Nov. 9, exempting securities firms from the requirement to maintain a 140 percent collateral ratio for margin loans.
The measure was decided at a market monitoring meeting held earlier that morning by Vice Prime Minister and Finance and Economy Minister Lee Hyoung-il, Financial Services Commission Chairman Lee Eok-weon, Financial Supervisory Service Governor Lee Chan-jin and Bank of Korea Senior Deputy Governor Kwon Min-soo.
It will take effect on Nov. 9. The exemption from the 140 percent requirement is expected to prevent a surge in forced stock sales triggered by a sharp decline in share prices. Securities firms are currently required to demand collateral worth at least 140 percent of the amount lent to customers through margin loans.
If falling stock prices push the collateral ratio below 140 percent and the investor fails to restore it within the repayment period, the securities firm forcibly sells the shares at the market price or the lower price limit.
However, with the exemption of the 140th% maintenance obligation, securities firms are not required to execute forced liquidations even if the collateral ratio of margin financing customers declines.
This measure aims to break the vicious cycle where a drop in stock prices lowers the collateral ratio (collateral valuation amount), leading to the release of forced liquidation volumes, which in turn causes further stock price declines. While the 140th% obligation has been temporarily suspended, it appears that securities firms will independently decide how low to lower the specific ratio, such as to 120% or 130%.
If the collateral ratio maintenance obligation is exempted, securities firms are expected to adjust downward their currently differentiated collateral maintenance ratios by company group. They may slightly lower the collateral ratio for each company group, including blue-chip stocks, general stocks, and high-risk stocks, or they may only lower the maintenance ratio for blue-chip and general stocks.
It is also possible to delay the timing of forced liquidation execution for accounts that meet certain conditions. Typically, forced liquidation occurs before market open on the third business day after failing to meet the collateral ratio; this measure would delay that timing by one additional day.
An official in the financial investment industry said, "Typically, collateral maintenance ratios are adjusted downward by company group," adding, "Specific details will be decided independently by each firm."
Since the margin loan collateral ratio is a mechanism to reduce securities firms' risk of "losing money," the burden of risk management increases for these firms. Another official in the financial investment industry noted, "If stock prices fall further than they have now, securities firms will bear the burden of unpaid margin loans," stating, "The burden of risk management increases."
In the past, financial authorities have also temporarily exempted securities firms from the collateral ratio maintenance obligation for margin loans to respond to market volatility.
They granted temporary exemptions during the stock market crash caused by the COVID-19 pandemic in March 2020 and during the global interest rate hike and sharp stock market decline (KOSPI falling below 2,300) in July 2022. In July 2022, they exempted the obligation for three months until the end of September and then extended it by another three months until the end of December.
Speculation is also emerging that financial authorities will implement additional measures if market volatility increases. In July 2022, financial authorities temporarily eased restrictions on the daily volume of buyback orders for listed companies. This approach reduces the possibility of sharp stock price declines by easing buyback order restrictions to keep the upper limit of demand open.
On this day, the KOSPI fell as low as 4,911.28 during trading hours due to concerns over eased regulations on AI data centers following a U.S. "Blue Wave" (Democratic Party landslide victory). This marked the first time since February 6 that the KOSPI dropped below the 5,000 mark during trading hours, a span of 273 days. At 9:03 a.m., Stage 1 circuit breakers were triggered, halting trading for 20 minutes.
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