South Korean financial authorities are poised to interfere in setting margin rates currently left freely up to brokerage houses amid a surge in trade on credit due to the retail stock craze.
The Financial Services Commission (FSC), the country’s top financial regulator, recently launched a task force to revise the guideline on setting rates for margin trade amid growing complaints about wide differences in lending rates by brokers.
Most of the credit loans extended by securities firms take securities as collateral, allowing them to make profits with virtually zero risk of losing money, said an FSC official. Brokerage houses can minimize losses with a margin call that enables a brokerage firm to immediately collect loans by mandating the investor to sell stocks or deposit more cash when the equity in the investor’s margin account drops below the maintenance level.
The current regulations allow securities firms to set interest rates on margin accounts under their own terms because there are no detailed ground rules on calculating interest rates, such as limits on credit premium charges, under the Korea Financial Investment Association’s guideline.
Given the situation, lending rates charged by securities firms for margin trading hover much higher than 2 to 3 percent in banking rates.
Mirae Asset Daewoo charges around 6 percent for lending of 30 days or less, and 7.8 percent for longer than 91 days. Another major brokerage house Korea Investment & Securities charges 4.9 percent and 10.5 percent, respectively, for the corresponding loans. Among others, interest rates on margin accounts vary between 4.5 percent and 9 percent.
Such a flexible rule on loan interest rates has allowed Korean securities firms to make big profits from retail stock frenzy.
According to the Korea Financial Investment Association, outstanding balance of margin accounts at securities companies topped 17 trillion won ($14.5 billion) recently, nearly tripled from 6 trillion won in March when local markets crashed. The figure is also high even compared to the end of last year, or before the COVID-19 outbreaks, when it stood at 9.2 trillion won.
Brokerage houses complain their lending rates reflect higher expenses than banking saving accounts.
If they are forced to cut margin rate by 1 percentage point from current level, total profit of local securities firms from 17 trillion won worth margin trading service would decline by 170 billion won.
By Jin Young-tae and Cho Jeehyun
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