FSS opposes credit financing

By Kang Seung-woo

The head of the nation’s financial watchdog asked CEOs of local financial investment companies to refrain from high-risk leveraged investments Wednesday.

“Amid growing volatility in the financial market, the number of individual investors who tend to leverage money through credit financing, equity-linked warrants (ELW) and foreign exchange margin trades has been on the rise,” Financial Supervisory Service (FSS) Governor Kwon Hyouk-se said in a meeting with 25 chief executives of financial investors.

He added that leveraged investment is vulnerable to price fluctuations, so investment firms are required to reduce the proportion of investment in order to secure soundness in the market as well as protect clients’ assets.

Kwon praised recent actions by the companies to stop or limit investment.

“It is significant that a few brokerage houses voluntarily stop the foreign exchange margin trade and cap credit financing,” he said.

Mirae Asset Securities surprisingly suspended its credit financing and downsized the credit line for fresh loans on Aug. 16, while Daewoo Securities strengthened the eligibility for credit financing.

Samsung and Hyundai Securities are also considering joining the stricter steps.

Credit financing is a stock-backed loan and is used for a higher return on a stock market where its price index is volatile.

Meanwhile, the Korean stock market was hit hard due to the recent downgrade of the U.S. credit rating by Standard and Poor’s and the ceaseless European debt crisis,.

Kwon said that fundamentally, Korea’s financial system is sound, but the recent turmoil resulted in increasing volatility in the market, so he required the CEOs to make efforts to beef up the financial markets as institutional investors in the situation that the Korean financial markets are highly influenced by foreign capital movements.

He also stressed that Korea has to enter the developed market category of the Morgan Stanley Capital International (MSCI) as soon as possible to boost Korea’s sovereign credit ratings, while nurturing hedge funds.

CEOs present at the meeting suggested that the financial authorities raise institutional investors like pension funds against financial turmoil and come up with regulations offering tax incentives to long-term installment-type equity funds.