South Korea to Waive Brokers’ 140% Margin Loan Collateral Requirement for Three Months From Nov. 9

South Korea’s financial authorities will temporarily ease collateral rules on margin loans to curb forced selling after a sharp stock-market drop. From Nov. 9 through Jan. 31, brokerages will be allowed to apply lower maintenance ratios or defer forced liquidation for about three months.

The Financial Supervisory Service and the Korea Financial Investment Association said on Nov. 8 that they will temporarily exempt brokerages from the requirement to maintain collateral ratios on credit extended to investors starting Nov. 9. The FSS will issue a no-action letter saying firms will not be penalized during the period even if they do not comply with the rule. Under current financial investment regulations, investors using margin loans must maintain collateral worth at least 140% of the borrowed amount. If a drop in share prices pushes the ratio below that threshold, brokerages demand additional collateral. If investors fail to meet the call, firms can forcibly sell the shares to recover the loan.

A lower collateral threshold gives investors more room to absorb declines in stock prices. For example, if an investor uses 10 million won of personal funds and borrows another 10 million won to buy 20 million won of stock, the account would previously have become subject to forced selling if the stock value fell below 14 million won. If the maintenance ratio is lowered to 130%, the account would not trigger forced selling until the stock value falls to 13 million won.

The move was decided at an emergency joint market review meeting held by government agencies after the Kospi tumbled following the U.S. midterm elections on Nov. 6. Authorities judged that if forced liquidations surge in accounts where collateral values have fallen, the added selling could flood the market and deepen the decline. They plan to ease that cycle by letting brokerages adjust maintenance ratios more flexibly.

Brokerages have also prepared measures to lower collateral ratios and defer forced selling. Mirae Asset Securities will cut the collateral ratio on margin loans for domestic stocks to 130% from 140% from Nov. 9 through Jan. 31. It will keep the ratio for overseas stocks at 140%. Korea Investment & Securities will run a three-month deferral program for clients whose accounts are scheduled for same-day or next-day forced selling. Clients with collateral ratios of 120% to 130% can receive a one-time deferral. Those in the 130% to 140% range can extend the deferral by applying each day.

Samsung Securities will apply a maintenance ratio 10 percentage points lower than usual for one day on Nov. 9 and then build a separate system for client applications. Kiwoom Securities will offer a one-day deferral for eligible accounts upon request. Still, delaying forced selling does not reduce the outstanding margin loan. If share prices fall further, investor losses could widen when the forced sale is eventually carried out.

Noh Jeong-dong, Hankyung.com reporter, dong2@hankyung.com