South Korea Unveils Strict Guidelines On CFD Trading

The financial market regulator for South Korea has launched a new set of strict guidelines for contracts for difference (CFD) trading. These guidelines are aimed at boosting transparency in the sector while also preventing market manipulation.

South Korea introduces strict rules on CFD trading

The new guidelines come amid significant changes that have happened in the South Korean financial market. The move comes around one month after eight stocks listed in South Korea attained the daily lower limit for nearly a week because of the impact of CFD trading.

CFDs trading involves leveraged derivatives products. The CFD accounts in question were liquidated, and it led to a loss of over 100 billion won, equivalent to around $77 million. The new guidelines on CFDs trading were announced by the Financial Services Commission (FSC) alongside other regulatory agencies such as the Korea Financial Investment Association, Korea Exchange, and the Financial Supervisory Service (FSS).

One of the new guidelines announced by South Korean regulators is more clarity on the entities that are authorized to offer CFDs trading. The current guidelines categorize retail investors as institutions where transactions are handled by a local broker, while a foreign investor is one where transactions are processed by a foreign broker. The regulator said that these guidelines trigger uncertainty on the origin of investments.

The Vice Chairman of the FSC commented on the development, saying, “The financial authorities will overhaul regulations on CFD trading so that investors can correctly identify information about the transactions – such as who the real investors of the CFD trading are and how high the liquidation risks that these CFD transactions bear are – and they will be able to make prudent investment decisions.”

The South Korean regulators also want to tighten the criterion that is used to determine a professional investor. Brokerage platforms will also be required to verify the qualification of professional investors after every two years. The other new regulatory guidelines include physical authentication when creating new CFD accounts. This authentication could previously be done online without this physical verification.

Regulators temporarily suspend CFDs trading

South Korean regulators have also recommended strict guidelines in CFD trading and account opening that will apply in the next three months. These guidelines will remain in effect until the new regulatory framework comes into play.

The majority of local brokerage platforms had also banned customers from creating new accounts since the end of April, which was around the time when controversy around CFDs trading sprouted.

These regulatory guidelines also came after several CFD brokers were inspected by the FSS. The investigation found that some brokerage companies created CFD accounts without verifying identities. Additionally, some brokers used misleading ads to promote risky investments.

The FSS is currently investigating an executive in the brokerage industry, and it plans to expand the scope of the investigation if need be. The regulators believe that trust in the market and investment sentiment have dropped in the recent month because of unfair financial transactions.