Inspection of Kiwoom Securities Unavoidably Requires Checking Chairman Kim Ik-rae's Involvement
The Financial Supervisory Service (FSS) has begun an inspection of Kiwoom Securities regarding CFDs (Contracts for Difference), which have been cited as the epicenter of the Societe Generale (SG) Securities-triggered crash. The investigation will also look into whether Ra Deok-yeon of H Investment Advisory and Kim Ik-rae, chairman of the Daou Kiwoom Group, who has recently been embroiled in controversy, are involved.
According to financial sources on the 3rd, the Financial Services Commission (FSC) and the FSS reported the inspection plan for major securities firms related to CFDs to the National Assembly’s Political Affairs Committee in a closed briefing the previous day concerning the SG Securities-triggered crash. Accordingly, the FSS started the CFD inspection of Kiwoom Securities on the morning of the 3rd and plans to soon begin inspections of other major securities firms. The inspection will examine whether individual professional investors’ conditions and regulations related to CFDs were properly followed, the use of customer order information, and whether internal executives and employees were involved. In particular, the involvement of Chairman Kim Ik-rae is a key focus. Since Kim Ik-rae is registered as a director of Kiwoom Securities, the inspection process inevitably includes checking whether executives and employees were involved in CFD transactions.
A financial authority official said, "Since CFDs were an issue in the SG-triggered crash, we will inspect any problematic areas and work with the FSC to improve the system as needed."
As of the end of February, 13 companies were operating CFDs, with Kyobo Securities holding the largest CFD balance at 613.1 billion KRW. This was followed by Kiwoom Securities with 518.1 billion KRW, Meritz Securities with 340.9 billion KRW, and Hana Securities with 339.4 billion KRW. Earlier, on the 28th of last month, the FSS convened CEOs of securities firms to order strengthened risk management related to CFDs, leading securities firms to temporarily suspend new subscriptions for domestic and overseas stock CFD services.
Additionally, financial authorities acknowledged to the National Assembly’s Political Affairs Committee that they failed to detect abnormal trading in advance related to the SG-triggered crash and reported plans to enhance monitoring and detection systems. The authorities judged that the recent stock price plunge was unrelated to short selling. Among the eight problematic stocks, five KOSPI stocks have been subject to a complete short-selling ban since March 2020. The authorities also reported analyzing whether the ban on short selling these five stocks was exploited for market manipulation.
The FSC, together with the FSS, will also push for improvements to the CFD system. This is because the number of individual professional investors engaging in CFDs has surged to 25,000, raising concerns about potential investor harm. The rapid increase in CFD trading by individual professional investors is attributed to the government’s relaxation of designation requirements for individual professional investors in November 2019 to promote venture capital supply.
A financial authority official said, "Rather than raising the minimum margin ratio for CFDs, we plan to enhance transparency through balance disclosures and may consider suspending CFDs for individual professional investors depending on the situation." As of the end of February, the CFD trading balance reached 3.5 trillion KRW, a 52.5% increase from 2.3 trillion KRW at the end of last year.
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