[2021 National Audit] CFD Forced Liquidations Up 2.3 Times Year-on-Year Through August

[Asia Economy Reporter Park Jihwan] It has been revealed that the scale of forced liquidation of 'Contracts for Difference (CFD),' an over-the-counter derivative product exclusively for professional investors, has approached 400 billion KRW through August this year. This is more than double the annual scale of last year. Concerns have been raised that a sharp drop in stock prices could lead to large-scale forced liquidations, requiring investor caution.

According to data on the 'Scale of Forced Liquidation of Domestic Securities Firms' Contracts for Difference (CFD)' submitted by the Financial Supervisory Service to Kim Byung-wook, the Democratic Party's ranking member of the National Assembly's Political Affairs Committee, the forced liquidation scale of CFDs from January to August this year was 381.8 billion KRW. This is more than 2.3 times the 161.5 billion KRW recorded last year.

CFD is an over-the-counter derivative product exclusively for professional investors that allows them to gain profits from stock price fluctuations without actually purchasing the stocks. Since only the difference between the buying and selling prices is settled in cash without holding the actual stocks, it is classified as a high-risk product with significant investment risk.

Only professional investors who meet certain requirements can trade CFDs, but the scale and number of CFD accounts have been rapidly increasing every year. As of the end of August this year, the balance of CFD accounts was 4.2864 trillion KRW. Compared to 1.2713 trillion KRW at the end of 2019, this is a 3.4-fold increase. The CFD account balance surpassed 2 trillion KRW for the first time in November last year and then exceeded 4 trillion KRW within a month. The number of individual investors holding CFD accounts also surged nearly sixfold from 823 at the end of 2019 to 4,720 as of the end of August. This is interpreted as a rapid increase in investors engaging in large-scale leveraged investments through CFDs amid the stock market boom continuing since last year.

The problem with CFDs is that when stock prices plunge, if investors fail to add additional margin, securities firms may forcibly liquidate stocks through forced liquidation. Forced liquidation, which was 6 billion KRW in 2018, surged to 107.7 billion KRW in 2019 and 161.5 billion KRW in 2020. This year alone, it reached 381.8 billion KRW from January to August.

Assemblyman Kim Byung-wook explained, "As market volatility has recently increased, concerns are emerging that investments using CFD services may also carry greater risks," adding, "CFDs are targeted at professional investors, but the requirements to qualify as a professional investor are not stringent." He pointed out, "If the stock market falls sharply as it is now, the prices of stocks invested in through leveraged CFD services could plummet, leading to additional large-scale forced liquidations, so caution is required."