By Kim Tae-gyu
Staff Reporter

The Seoul administration will pull out all the stops to prevent retail investors in foreign exchange (FX) derivative transactions from going to extremes in the risk-laden market.

Those risk-loving investors in the foreign exchange markets, known as "Mrs. Watanabe" in Japan and notorious for their reckless investments in detrimental products, will struggle to take a root in Korea.

"The FX margin transactions have increased almost six-fold last year from a year before and the contract amount reached 361 trillion won as of this May. Most of the investors are individuals," Financial Services Commission (FSC) Director General Hong Young-man told a press conference.

"The problem is that they usually end up losing money and the overall losses are rising fast. Upside of 90 percent of investment generates losses. Plus, we identified several illegalities," Hong said.

The FX margin trading refers to multi-currency investment of which returns depend on the fluctuation of the exchange rates of the two currencies involved.

Its attraction is high leverage - Koreans can trade in currencies in an amount up to 50 times their margin deposit. For instance, they can buy $100,000-worth of euros with a mere $2,000.

"It is just like a gambling. You may hit a jackpot but in most cases, you lose your margin deposit immediately. We found that about 70 percent of investors lose their deposits in less than 15 days," Hong said.

"Hence, we will restrict the leverage rate to just 20 times from the current 50 times. Unlawful transactions via unauthorized players will be also cracked down on," he said.

Hong said that individual investors are destined to lose in the FX margin trading because of its high transaction costs.

"Six out of our seven derivative firms depended on the same FX dealer member in the United States. The monopolistic status seems to have something to do with the high costs," Hong said.

Hong did not identify the FX dealer member but a high-ranking FSC official said that it was FXCM, a financial services firm that specializes in the retail FX business.

FXCM may have to sweat because the FSC is poised to force the country's derivative outfits to sign FX margin trading deals with multiple dealers.

"Starting next year, domestic derivative entities would be obliged to dole out contracts with multiple dealers so as to provide bid-ask prices from multiple sources to customers," Hong said.

voc200@koreatimes.co.kr