Even as authorities curb new debt-driven investments, the lurking threat of "margin calls" in a plunging market sparks fresh anxiety over a cascading sell-off.

As financial authorities clamp down on debt-fueled investing (known locally as bit-too), the recent spike in stock market volatility has turned the threat of forced liquidations on existing credit loans into a new source of market instability. Starting today, new measures take effect to curb the excessive concentration of credit loans in specific stocks. However, this does not wipe out the risks already accumulated from prior leveraged investments.

Market watchers warn that if stock prices fall further, margin calls on existing loans could trigger forced selling, further exacerbating the market downturn. This highlights the growing necessity for financial authorities and securities firms to actively manage the risks of legacy credit loans, independent of efforts to curb newly accumulated debt.

1. Stopping New Debt While Legacy Risks Remain: The Regulatory Dilemma

According to the financial investment industry on the 18th, the Financial Services Commission (FSC) held an emergency meeting on the 15th in response to the stock market crash, ordering financial institutions—including securities firms—to exercise restraint regarding indiscriminate credit extensions. FSC Chairman Lee Eok-won emphasized the risks of investments overly reliant on debt and credit, urging firms to prioritize customer protection and risk management.

This directive aligns with the credit loan concentration management measures taking effect on the 19th. The Korea Financial Investment Association (KOFIA) and 10 comprehensive financial investment businesses formulated voluntary credit management guidelines last month. The core of this initiative is that if credit loans for a specific stock exceed 15% of a firm’s total credit loans, new credit loans for that stock will face stricter controls.

Individual investment firms can utilize methods such as lowering borrowing limits per investor for the stock or raising the deposit rate—the proportion of personal capital investors must put up when purchasing shares. Specific management methods are determined autonomously by each securities firm.

A notable aspect is that the new measures apply only to new investments rather than existing credit loans. KOFIA explained that this is intended to minimize market shock. Investors who previously borrowed money to buy stocks are not required to immediately repay loans solely due to the implementation of the new standards. Legacy loans continue to be managed under previous frameworks, such as maturity dates and collateral maintenance ratios set out in their initial agreements.

Credit loan regulations also present a market stability dilemma. If authorities pressure investors to simultaneously unwind existing loans under the banner of risk reduction, investors may be forced to sell off holdings to pay down debt. While the market might absorb such selling pressure during stable periods, it is highly likely to act as an additional downward catalyst during a market plunge.

2. Lingering Margin Call Risks on Legacy Debt: Fears of Cascading Sell-Offs

Even if the new regulations do not apply to legacy loans, the threat of margin calls remains. Credit loans operate by taking stocks purchased with borrowed funds as collateral. If stock prices tumble and the collateral value drops below a certain threshold, securities firms demand that investors cover the deficit. If investors fail to supply cash or additional collateral within a specified deadline, firms resort to margin calls—forcibly selling the collateralized shares to recover the loan.

During market crashes, collateral values across multiple investors often plummet simultaneously. As investors unable to secure additional collateral multiply, the likelihood of a massive wave of forced liquidation pouring into the market increases exponentially. This can ignite a vicious cycle where forced selling drives stock prices down further, triggering additional collateral deficits and cascading margin calls among other investors.

Margin call liquidations surged during this year's market downturns as well. According to the office of People Power Party lawmaker Kim Sang-hoon, margin call execution amounts across 10 major securities firms hit approximately 180 billion won last March—nearly triple the 61.2 billion won recorded the previous month—amid shocks stemming from the Middle East. Liquidations spiked again in June, surging 188% month-over-month to 393.5 billion won compared to 136.8 billion won in May.

Massive credit liquidations have also materialized in past market crashes. According to Financial Supervisory Service (FSS) data, margin call liquidations at the 10 major securities firms reached 2602 billion won in August 2024, marking the highest monthly volume of that year. On August 5 of that year, the KOSPI plummeted 8.8% and the KOSDAQ plunged 11.3%.

Consequently, the liquidation risks that threaten to materialize in a market crash cannot be resolved solely through stock-specific credit concentration controls. Because these measures merely restrict newly supplied credit to prevent over-concentration, the preexisting risks of collateral deficiencies and margin calls accumulated in legacy portfolios must be managed separately.

Suppressing margin calls outright is also challenging. If lenders fail to recover loans despite dropping collateral values, the credit risk borne by securities firms themselves escalates. Conversely, risk management remains complex because when margin calls from multiple brokerages concentrate on specific stocks or moments, they amplify downward market pressure.

As a result, experts stress that amid expanding market volatility, authorities must closely scrutinize not only the growth pace of new credit loans but also the collateral deficiency risks and liquidation probabilities of legacy loans.

An official from the financial investment industry noted, "We need thorough checks on how rapidly additional collateral demands are growing due to stock crashes and whether margin calls are likely to concentrate on specific times or stocks. Investors must also recognize that new regulations do not protect existing loans, making it vital for them to check their individual collateral maintenance ratios, top-up deadlines, and liquidation conditions."

3. The Three Defenses Absorbing Foreign Dumping Have Disappeared: KOSPI Plunges to the 5400 Range in Search of a Rebound

The domestic stock market is shaking under severe supply-demand imbalances. Foreign investors are unloading massive sell orders, yet no buying entities are stepping in to absorb them. Individual investors—who historically cushioned foreign sell-offs—have seen their purchasing capacity wane due to credit trading burdens and dampened market sentiment, while the "breakwaters" of treasury share buybacks by Samsung Electronics and SK Hynix have vanished. The KOSPI has slipped to the 5400 range for the first time since July, and the KOSPI 200 Volatility Index (V-KOSPI) broke past the fear threshold of 50 on the 15th for the first time since late August.

According to KOFIA on the 17th, investor deposits stood at 96.9121 trillion won as of the 15th. Deposits had dropped below the 100 trillion won mark on the 14th (at 97.4280 trillion won) for the first time since August 21. Investor deposits represent cash sitting in brokerage accounts, widely regarded as "ammunition" for stock investing. Conversely, credit transaction balances stood at 32.7499 billion won, maintaining an upward trajectory after shrinking to the 27 trillion won range on August 4 and topping 34 trillion won on the 13th of this month. In short, stock market dry powder has shrunk while leveraged investment burdens have expanded.

The expansion of credit trading acts as a ticking time bomb because it leads directly to margin calls during market crashes. When stock prices drop and collateral values decline, securities firms demand additional collateral, and if investors fail to meet the deadline, their holdings are forcibly liquidated. Pouring forced sell orders into the market during this process creates a vicious cycle that drags stock prices down further.

A wave of forced liquidations became pronounced over the three trading sessions starting from the 13th, when a sell-side car was triggered on the KOSPI market. Both the amount and proportion of margin calls relative to unsettled consignment purchases surged. Unsettled consignment purchases represent transactions where investors failed to pay for purchased shares by the settlement date. Margin call amounts (and their proportions) were: 59.4 billion won (5.6%) on the 13th, 89.3 billion won (7.2%) on the 14th, and 80.5 billion won (5.9%) on the 15th. This marks the first time since late July that margin call volumes and ratios both exceeded 80 billion won and 7%.

Lee Jun-young, a researcher at Yuanta Securities, noted, "The average purchase price for retail investors formed in the late 6000 to early 7000 range on the KOSPI. With the recent plunge shaving off about 15% to 20%, it appears that liquidations hit their highest volume since late July. For leveraged investors, if stock drops push collateral maintenance ratios below baseline thresholds, additional collateral demands and forced liquidations will follow."

While margin calls surged heavily in May and June as well, those periods contrasted starkly with the present because they were accompanied by aggressive buying from retail investors. Over 24 consecutive trading sessions starting early May, foreign investors offloaded 76 trillion won while retail investors net-purchased 60 trillion won to defend the index. Investment fever had flared up, fueled by strong expectations for semiconductor rallies alongside the launch of single-stock leveraged ETFs.

In contrast, recent sentiment toward AI and technology stocks—including semiconductors—has frozen abruptly, battered by concerns over China’s ChangXin Memory Technologies (CXMT) new product releases and the financial health of cloud computing firm CoreWeave.

Supply support from the treasury share buybacks of Samsung Electronics and SK Hynix has also dwindled. Samsung Electronics concluded its share buybacks on the 6th, and SK Hynix is nearing completion. Pension funds, which traditionally acted as buyers during downturns, remain sidelined due to delayed asset rebalancing. Analysts point out that there are simply no viable market participants left to absorb the foreign sell-off.

Some experts suggest that the circuit breakers triggered on the KOSPI market on the 15th were driven more by a vacuum of buyers than by damaged fundamentals. Lee Jae-won, a researcher at Yuangta Securities, analyzed, "With 80% to 90% of cumulative foreign net selling since the beginning of the year concentrated in Samsung Electronics and SK Hynix, treasury share buybacks—which supported the market floor last month—dropped sharply following the conclusion of Samsung's purchases. Furthermore, retail investors who net-purchased over 100 trillion won year-to-date have seen deposit growth stall, and the defense capacity of pension funds remains limited."

Lee added, "Without buyers to absorb foreign dumping, a sell-off vicious cycle similar to the leverage liquidation phase in late July is repeating. For supply-demand dynamics to recover, the mitigation of AI credit risks and restored confidence in semiconductor profit projections must precede."

4. "We Should Have Blocked It Even If It Meant Laying Down": Retail Investors' 2 Trillion Won Losses on Leveraged ETFs Reignite FSS Parliamentary Audit

Controversy surrounding single-stock leveraged Exchange-Traded Funds (ETFs) is expected to reignite during the National Assembly audit of the Financial Supervisory Service (FSS) scheduled for the 19th. The opposition bloc is focusing heavily on how individual investors suffered losses from the introduction of single-stock leveraged ETFs while securities firms pocketed over 90 billion won in commissions—criticizing the outcome as merely fattening the brokerages' bottom lines. Confrontations over regulatory responsibility are projected to be unavoidable.

According to the financial investment industry on the 16th, the National Assembly’s Political Affairs Committee will conduct a parliamentary audit targeting the FSS and other entities on the 19th. Much like the earlier audit of the FSC, accountability for the single-stock leveraged ETF policy is expected to surface as a major point of contention.

While the primary debate during the FSC audit centered on policy implementation responsibility, the FSS audit is projected to focus scrutiny on post-launch side effects. Single-stock leveraged ETFs were introduced to lure "Seohak ants" (domestic retail investors trading overseas) back to the Korean market, with the stated goal of curbing exchange rate volatility. Considering that various leveraged products trade overseas, authorities argued the move would expand investors' financial product choices and elevate the attractiveness of the Korean stock market.

However, retail investors flocked to these single-stock leveraged ETFs only to suffer widespread losses. Critics have lambasted the outcome, arguing that securities firms reaped brokerage commission revenues while leaving retail investors empty-handed.

According to data submitted by the FSS to the office of People Power Party lawmaker Choi Eun-seok, confirmed trading losses incurred by retail investors in single-stock leveraged and inverse ETPs (ETFs and ETNs) totaled 2.3242 trillion won. This figure covers data compiled from 10 comprehensive financial investment businesses between the product's launch on May 27 and August 14.

Conversely, securities firms collected 93.1 billion won in consignment trading commissions over the two months following the products' launch. This figure, compiled by the office of People Power Party lawmaker Kim Jae-seob using Korea Financial Investment Association data, tracks performance from the launch of 16 single-stock leveraged ETFs for Samsung Electronics and SK Hynix through the end of July.

While speculation initially circulated that the National Assembly might summon securities firm CEOs as witnesses for the audit, plans for witness summonses ultimately fell through.

Lawmakers are also expected to question FSS Governor Lee Chan-jin regarding supervisory accountability. During a regular press briefing in June, Governor Lee sparked controversy by stating, "I regret that we didn't block it even if it meant lying down in protest." This was widely interpreted as financial authorities admitting that the policy's side effects heavily outweighed its meager benefits. Consequently, during a Political Affairs Committee reporting session last July, Governor Lee offered an apology, stating, "I deeply feel the responsibility and am deeply sorry."

Measures addressing debt-fueled investing amid recent stock market volatility have likewise surfaced as a core agenda item. As of the 15th, the scale of credit transaction financing—where investors borrow from securities firms to buy stocks—stood at a staggering 32.7498 trillion won.

Following the FSS's directive for securities firms to tighten debt-fueled investment management, KOFIA rolled out voluntary credit management enhancement plans last month alongside 10 comprehensive financial investment firms, including Mirae Asset Securities and Korea Investment & Securities. These measures include capping credit loan handling scales within 90% of a securities firm's own capital (down from 100%) and managing credit loan portions for specific stocks within 15%. The FSS plans to reinforce monitoring to ensure securities firms faithfully adhere to these voluntary management guidelines.

[ⓒ Global Economic Times. 무단전재-재배포 금지]