South Korea's financial industry regulator, the Financial Services Commission (FSC), has identified a series of measures to strengthen its regulation of contracts for difference (CFD) trading.

(a) Improve transparency in the provision of investment-related information

To help investors make more rational CFD investment decisions, the authorities will improve the system to ensure that investors are provided with more appropriate investment information. CFDS investors are mainly individual retail investors (about 96.5%), but at present, after a retail investor trades a CFDS, if the order is submitted by a domestic securities company, the investor is labeled as an "institutional investor", and if the order is submitted by a foreign securities company, the investor is labeled as a "foreign investor". This has created the problem of institutional and foreign investors misrepresenting the flow of investment funds into specific investment projects. To prevent this misunderstanding among market participants, the stock trades resulting from CFD trading will actually record the type of investor (such as individual investors). In addition, as with credit loans, the total and itemized balances of CFDS will be published for reference, allowing market participants to understand the inflow of leveraged investment funds.

(b) Plugging leaks and preventing regulatory arbitrage

Like credit loans, CFDS will be included in the maximum credit line of securities firms. Thus, the securities firm must manage the entire limit within its share capital level. In addition, a set of best practice guidelines on the handling of CFDS, including the broking and coverage standards for CFDS, will be prepared to restrict trading in CFDS for illiquid projects. Until now, CFDS have been classified as over-the-counter derivatives and are not subject to the credit limits of securities firms or industry risk management best practice guidelines. The authorities believe that this has led to an excessive expansion of improper trading and has led to CFD trading being used for investments in illiquid projects, thus increasing the volatility of share prices. In the end, this not only harms investors, but also negatively impacts the robustness of securities firms. In addition, the government plans to submit amendments to the Financial Investment Services and Capital Markets Act (FSCMA) to the National Assembly in the third quarter of this year. The idea is that since the interest of CFD sellers is substantially similar to that of short sellers, the authorities will require sellers to declare their balances and restrict their participation in paid-in capital increases.

(c) Strengthen identification checks for qualified professional investors and enforce new requirements for OTC derivatives transactions

The authorities will strengthen the process for granting qualified professional investor status to individual investors and will develop a new set of requirements for over-the-counter derivatives trading such as contracts for difference. In addition, securities companies will conduct checks every two years on whether qualified professional investors maintain their professional qualifications, and prohibit any act by securities companies to encourage individual investors to apply for qualified professional investor status (through incentives).

In addition, while keeping the current requirements for qualified professional investors unchanged, the authorities will establish additional separate requirements to verify their eligibility to trade OTC derivatives such as CFDS through a face-to-face verification process, including video calls. That is to say, even qualified professional investors will be restricted in investing in OTC derivatives such as CFDS if the investor does not have sufficient investment experience in high-risk investment products (equities, derivatives and highly complex derivatives related securities). The authorities plan to introduce new OTC derivatives trading requirements (minimum investment amount), comparable to the current requirements for investing in private equity funds, strictly scrutinize the qualifications and experience of investors to ensure that they are capable of handling risky investments such as OTC derivatives without seriously damaging the supply base of venture capital.

The FSC recommends that qualified professional investors suspend new CFD trading for the next three months until these measures are actually implemented.