Korea FX leverage limits take effect today

As of today (Monday March 5) South Korean FX traders will be limited to 10x leverage (down from 20x) on new trades, with maximum maintenance leverage of 33x (3% margin) on existing positions. This is the second max leverage reduction for Korean traders – in September 2009 allowed leverage was reduced from 50x to 20x.

The Korean regulators, the Financial Services Commission (“FSC”) and the Financial Supervisory Service (“FSS”), have been very open about the fact they will act aggressively to discourage retail investors from taking large trading positions. The FSC and FSS both believe that highly-levered trading has been the cause of social problems in the country.

This latest move makes the Korean regulators the world’s strictest in terms of leverage. U.S. regulators (CFTC / NFA) now allow leverage of 50x on Forex major pairs (20x on all others), while Japan’s JFSA reduced max leverage to 25x as of last August.

As we reported earlier, the result of leverage reductions in both the U.S. and Japan has been a severe reduction in overall retail FX trading volumes, in the neighborhood of 25-40%. It remains to be seen what effect the 10x leverage will have in Korea, but we would expect that with a lot of the “juice” and excitement taken out of the market, there will be a major pullback by Korean traders, and (similar to what we have seen in the U.S.) further consolidation in the Korean market. Korea’s online FX trading scene is somewhat divided between securities brokers adding FX operations (e.g. Kiwoom, Hyundai, Hanmag) and FX/Futures brokers, such as KEB. We believe that the resulting leverage may scare some of the securities dealers out of the market, as they decide to focus on other growth areas.

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