Service Starts from the 1st at Kyobo, Meritz, Yuanta, and Eugene Investment Securities
CFD Enables Individuals to Short Sell... Regulatory Oversight Enhances Trading Transparency
Capital Gains Tax at 11% Accounts for Half of Stock Transactions... Advantageous for Attracting High-Net-Worth Investors
Kyobo Securities, Meritz Securities, Yuanta Securities, and Eugene Investment & Securities resumed their Contract for Difference (CFD) services starting from the 1st of this month. This contrasts with most securities firms that are still weighing whether to restart the service, as CFDs were used as a tool for stock price manipulation during the Ra Deok-yeon gate, damaging their image. However, these firms believe they cannot simply abandon the business considering the advantages of CFD products.
According to the securities industry, Kyobo Securities, Meritz Securities, Yuanta Securities, and Eugene Investment & Securities have restarted CFD services. In contrast, NH Investment & Securities plans to resume the service in October after upgrading its IT system. KB Securities is also reportedly inspecting its internal systems in accordance with the financial authorities' investor protection policies. Korea Investment & Securities, Hana Securities, DB Financial Investment, and Kiwoom Securities have also decided to offer the service but have not yet set a reopening date.
SK Securities withdrew from the CFD business in June. Samsung Securities has not yet decided whether to resume its CFD business. A Samsung Securities representative said, "We plan to maintain the suspension of CFDs, and no direction has been decided regarding the CFD business."
CFDs are over-the-counter derivatives that allow investors to gain profits from price fluctuations without actually owning the underlying stocks. The service was suspended after being identified as a cause of the stock price crash triggered by Soci?t? G?n?rale (SG) Securities in April. Going forward, CFD services will be provided with enhanced investor protection measures under financial authorities' regulations.
Despite stricter regulations, the securities industry continues the CFD business because CFDs are considered attractive products in themselves. The biggest advantage cited by securities firms is the ability to engage in short selling.
A Kyobo Securities representative explained, "CFDs allow both long and short positions without owning the underlying stocks. Short selling was perceived as exclusive to institutions and foreigners, but through CFD trading, individuals can also take short positions."
Tax benefits are also seen as incentives attracting high-net-worth individuals. Under current law, investing more than 1 billion KRW in a single domestic stock classifies an investor as a major shareholder, subjecting them to a 22% capital gains tax. If the total financial income, including interest and dividends, exceeds 20 million KRW annually, a comprehensive financial income tax of up to 49.5% applies.
However, CFDs are subject to only an 11% capital gains tax regardless of domestic or foreign stocks. This tax rate is about half that of stock investments because CFDs are classified as derivatives rather than securities. As more investors put money into U.S. stocks like Nvidia, Tesla, and Apple, major investors find CFD investments advantageous. Consequently, CFDs have long been used as a tax-saving tool by wealthy individuals.
This trend is expected to continue for the next two years. From 2025, a financial investment income tax will be introduced, taxing profits from financial investment products. Under this tax, regardless of major shareholder status, individuals earning above a certain threshold from stocks, bonds, funds, and derivatives will pay a 20% tax, with a 25% tax on profits exceeding 300 million KRW.
A securities industry official said, "Unlike large securities firms with robust wealth management (WM) services, small and medium-sized firms often operate CFD businesses to serve high-net-worth clients. Considering the demand from customers who already hold CFD positions, resuming the service is necessary."
Financial authorities' strengthened CFD regulations also help reduce the burden on securities firms. Since the service resumed on the 1st, CFD trading results are reflected in the exchange system according to actual investor types (individual, institution, foreign). Similar to credit loan balances, total and stock-specific CFD balance disclosures are made, and the scale of CFD handling is included in the securities firms' credit extension limits, allowing trading up to 100% of their capital.
Another securities firm representative said, "CFD trading has become more transparent, and the requirements for eligible individual professional investors have become stricter. Since mainly customers with high investment understanding use CFDs, the risk has actually decreased."
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