South Korea's Financial Supervisory Service has urged the securities industry to strengthen investor guidance and risk management related to margin loans to prevent losses from so-called debt-fuelled investing amid recent Middle East-driven stock market volatility.

The FSS said on Tuesday it held a meeting in Seoul with executives in charge of margin loans at 11 brokerages at the Korea Financial Investment Association in Yeouido to discuss leveraged investing.

Hwang Sun-oh (황선오), a deputy governor at the FSS, said the current scale of margin loans and forced selling was manageable. He added that leverage investments such as margin loans could act as a risk factor as stock market volatility increases.

According to the FSS, outstanding margin loans stood at 32.8 trillion won as of March 6. That was 0.6 percent of market capitalisation, down from 0.7 percent at the end of last year.

The average daily amount of forced selling from leveraged investments in the first week of March was 83.9 billion won, or 0.13 percent of total trading value.

The FSS emphasised that brokerages should guide investors so they understand how leveraged trading works and the risks of forced selling.

It also told brokerages to conduct internal checks on investment limits such as credit provision and to upgrade their risk management systems by sharing industry best practices.

It said adjustments to margin loan interest rates or fee promotions that could encourage investors should be operated cautiously.

The FSS said it plans to review response measures if needed, including margin loan promotions and checks on whether management of margin loan limits is appropriate.

The securities industry also said it will respond actively to rising market volatility with pre-emptive risk management measures and do its utmost to protect investors.

[Yonhap News Agency]