The South Korean financial regulator has announced new rules to tighten oversight of the trading of complex financial contracts known as CFDs. The measures aim to protect retail investors and ensure stability in the country's financial markets.
First, the regulator will require more transparency in how CFDs are sold to investors. Securities firms will have to properly disclose the investor type, such as individual or institutional, when facilitating CFD trades. They will also have to regularly report the total amounts of CFDs traded to allow regulators to monitor leveraged investments.
Second, the regulator is closing loopholes that have allowed regulatory arbitrage in the CFD market. CFDs will now be included under the limit on how much securities firms can lend to investors. The regulator will also issue best practices for firms in areas like facilitating CFD trades and ensuring enough collateral. Previously, CFDs escaped these rules by being classified as over-the-counter derivatives. The lack of oversight has led to risky practices that harmed investors and even the firms themselves. A law revision will also allow the regulator to require reporting from CFD sellers and restrict their business activities.
Third, the rules around qualified professional investors and OTC derivatives will be tightened. The regulator will strengthen reviews of investors applying for the qualified professional status. Firms will have to re-check this status every two years and will be banned from encouraging unqualified investors to apply. Separately, even qualified investors will face restrictions on CFDs if they lack experience with risky assets. A minimum investment amount for CFDs and other OTC derivatives will be imposed, similar to private equity funds.
The new rules will be phased in over three months. Securities firms that have systems and controls in place to comply will be allowed to resume CFD trades, starting with qualified professional investors. The gradual approach aims to curb CFD transactions while still facilitating venture capital funding.
The regulator hopes the new regulatory regime will direct CFDs and other complex investment products to suitable investors. At the same time, it aims to stamp out malpractices that have threatened market stability and hurt small investors.
