South Korea's financial watchdog plans to draw up measures to mend the practice of handling currency margin trading in a bid to prevent retail investors from inflicting heavy losses, officials said Sunday.
Margin trading allows investors to place heavy bets on currency volatilities with a relatively small amount of money. Currency margin trading can yield huge profits, but it can also inflict heavy losses on investors if wrongfully bet.
The financial watchdog imposed tougher regulations on currency margin trading in July 2009 by raising the value of collateral. But more retail investors have begun to place excessive bets on derivative trading as currency volatilities are increasing, exposing themselves to highly speculative trading.
"Starting next month, the financial watchdog plans to conduct on-the-spot inspections over practices of currency margin trading handled by large-sized securities and futures firms," said an official at the financial authorities.
"As the trading involves higher risks and retail investors excessively take part in the trading, the watchdog plans to check whether those institutions sufficiently inform them of risks of the trading."
The financial regulator said it plans to draw up a set of measures to prevent retail investors from suffering from losses, based on the outcome of the inspection. About 90 percent of retail investors are estimated to have inflicted losses from currency margin trading.
The watchdog is also considering imposing stricter punishments on local financial firms if they are found to break related rules.
Currently, six futures companies and 18 securities firms are brokering currency margin trading services with foreign dealers and local investors.
In the wake of the global financial turmoil, the value of currency margin trading contracts increased, data showed.
The value of currency margin trading contracts reached US$492.4 billion in 2008, sharply up from $76.5 billion seen in 2007, data showed.
It amounted to $495.6 billion and $463.8 billion in 2009 and 2010, respectively, and in the first three months of this year, the value of such contracts is tallied at $151.6 billion, it said.
The financial watchdog said retail investors lost 44.9 billion won in the first five months of 2009, compared with 48.9 billion won in losses registered in the whole of 2008.
In July 2009, the Financial Services Commission decided to raise the value of margin to 5 percent of investors' trading, up from 2 percent, leading to lower the leverage in currency margin trading to 20 times of collateral from 50 times.