Forced stock liquidations in South Korea triple year-on-year, averaging $27 million daily

South Korea's stock market is experiencing a surge in forced liquidations, with the daily average of forced sales reaching 37.3 billion won (approximately $27 million) in May. This dramatic increase, more than tripling from the previous year's average of 10.02 billion won, stems from a rise in credit and margin trading, commonly known as "debt-to-invest" (bitu). When investors fail to repay their debts, securities firms are compelled to sell their holdings to cover the shortfall.

The total balance of credit loans, where investors borrow money from securities firms to buy stocks, has steadily climbed. It rose from 20.9 trillion won last year to 36.3 trillion won by May this year. Similarly, the average daily balance for margin transactions, which allow investors to pay only a portion of the stock price upfront, increased from 900 billion won to 1.4 trillion won over the same period.

The Financial Supervisory Service (FSS) convened a meeting with chief risk management officers from major securities firms to address the escalating situation. The FSS highlighted the sharp rise in forced liquidations, noting that credit-related forced sales increased from 4.03 billion won to 7.6 billion won daily, while margin transaction-related sales surged from 5.99 billion won to 29.76 billion won.

During the meeting, the FSS urged securities firms to move beyond mechanical risk management and adopt a more proactive approach, considering market conditions. They were also instructed to strengthen risk warnings to ensure investors fully understand the structure and dangers of credit and margin trading, particularly the risk of forced liquidation.

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Securities firms must move beyond mechanical risk management and manage risks more actively, considering market conditions. Please also strengthen risk guidance so that investors can fully understand the structure and risks of credit and margin trading.