South Korea's brokerage industry will strengthen self-regulation to reduce investor losses and forced selling risks from rising margin loans. It is pushing plans to cut the credit limit for comprehensive financial investment businesses to within 90 percent of equity capital and raise the minimum margin requirement on margin loans to 50 percent.

The Korea Financial Investment Association said on Tuesday it will implement measures to strengthen self-regulation on margin loans with 10 comprehensive financial investment businesses to protect investors and prepare for increased market volatility. It drew up the measures through a meeting of the firms' chief risk officers held on Sept. 21.

From Oct. 1, the firms will manage outstanding credit exposure, including margin loans, within 90 percent of equity capital. That is 10 percentage points below the current legal limit of 100 percent of equity capital.

It is also pushing a plan to raise the minimum margin requirement on margin loans to 50 percent, 5 percentage points higher than at present. The measure will be applied within the year after industry consultations, as it requires systems development and simultaneous implementation by all brokerages.

It will also strengthen oversight of situations where margin loans are excessively concentrated in specific stocks.

From Oct. 19, if margin loans in a specific stock exceed 15 percent of a brokerage's total outstanding margin loans, the brokerage will draw up its own measures to reduce the share. Options may include lowering per-person margin loan limits or raising margin requirements.

To reduce market impact, the measures will not apply to existing positions and will apply only to new positions. Depending on market conditions and the impact of implementation, the industry may also push within the year to further lower the threshold for margin loan concentration in a specific stock to 10 percent from 15 percent if necessary.

The specific degree of limit reductions and management methods will be set by each brokerage, considering factors such as its client mix and risk management conditions. The association plans to regularly check whether firms are complying.

The association plans to consult the industry so that the 90 percent credit limit and the higher minimum margin requirement can also be applied to brokerages other than the comprehensive financial investment businesses.

The measures reflect the view that if margin loans rise rapidly, investor losses and forced selling risks could grow in tandem as stock market volatility increases.

Cheon Seong-dae (천성대), head of the Securities and Futures Division at the Korea Financial Investment Association, said excessive use of margin loans can increase investor losses as market volatility rises. He said the industry will protect investors and build a trustworthy capital market environment through voluntary and pre-emptive management.