Korean Regulators Launch Emergency Review of Margin Trading Amid Middle East Crisis

South Korea's financial regulators have begun directly examining securities firms' margin lending operations as domestic markets plunged following escalating tensions between the United States and Iran, raising concerns about forced liquidations.

The move comes as margin trading—a key indicator of leveraged investing or "borrowed money investing"—has surged amid the recent stock market boom. Authorities are stepping up risk management as the Iran shock amplifies uncertainty.

According to the financial investment industry on the 4th, the Financial Supervisory Service (FSS) requested major domestic securities firms on the 3rd to submit data on margin lending volumes and their outlook for the domestic stock market following Middle East developments.

"The purpose is to comprehensively examine investors' trading patterns and more accurately analyze margin trading patterns in light of the Iran situation," a financial regulatory official said. "We also want to understand how securities firms currently view the domestic stock market after the Middle East situation."

The FSS established a task force on the 3rd to respond to volatility stemming from Middle East developments and launched 24-hour monitoring across financial markets including stocks, bonds, and short-term money markets.

"If the Middle East situation becomes prolonged, there are concerns about rising international oil prices and increased financial market volatility, so we must maintain heightened vigilance and concentrate our supervisory capabilities on financial market stability," FSS Governor Lee Chan-jin emphasized at an executive meeting.

The financial investment industry has continuously raised concerns about the scale of leveraged investing. Margin trading, the representative indicator of borrowed-money investing, has been climbing steeply and breaking record highs daily. Margin lending—borrowing money from securities firms to purchase stocks—tends to increase during bull markets as expectations rise.

According to the Korea Financial Investment Association, margin loan balances recorded 32.8041 trillion won on the 3rd, setting a new record. After exceeding 30 trillion won for the first time in late January this year, the figure has grown by more than 2 trillion won in less than two months. This represents a surge of 5.5177 trillion won from the 27.2864 trillion won balance on December 31 last year. Investor deposits, considered standby funds, also hit an all-time high of 129.8188 trillion won as of the previous day. The ratio of leveraged investing relative to market size has at least decreased compared to before, as market capitalization has expanded.

The high-risk nature of leveraged investing is also cited as a reason regulators are conducting preemptive soundness management. Margin lending allows investors to seek additional returns using loans as leverage. However, when stock prices fall, the collateral value of pledged shares becomes insufficient, leading to forced liquidation of holdings—posing significant risk to investors.

"Beyond the funds previously locked in savings deposits now flowing into the domestic stock market 'fire market,' leveraged investing has become noticeably more active due to FOMO (Fear of Missing Out) psychology," a securities firm official said.

Some securities firms have temporarily suspended new margin lending transactions after exhausting their credit extension limits. Under the Capital Markets Act, comprehensive financial investment business operators must not exceed 100% of their equity capital in total credit extensions.

Korea Investment & Securities temporarily suspended new margin loan purchases and new margin short sales starting that day, with the resumption date undetermined. NH Investment & Securities also decided to temporarily suspend new margin loan purchases starting the 5th. Shinhan Investment Corp. announced on the 3rd that its credit extension limit was expected to be exhausted, and that securities-backed loans and margin lending services may be suspended once the limit is confirmed.