"Even Managers and Directors Are Doing It"... Is the '100 Trillion Won Leverage Investment' Driven by the KOSPI Frenzy Safe? [Weekend Money]

Leverage Investment Pushes Margin Balances to Record 37 Trillion Won
Securities Firms' Short-Term Bond Issuance Surpasses 100 Trillion Won for the First Time
Shin Young Securities: "Regulations Provide a Safety Net"

As the KOSPI continues to break record highs following its breakthrough of the 9000 mark, an employee is monitoring the stock market and exchange rates at the dealing room of Hana Bank's headquarters in Jung-gu, Seoul on June 19. On this day, the KOSPI opened at 9,288.89, up 225.05 points (2.48%) from the previous day, while the KOSDAQ opened at 1,001.40, up 0.47 points (0.05%), falling to the 900 level during the trading session. Photo by Jo Yongjun

On June 18, the KOSPI crossed the 9,000 mark for the first time in history, opening a new chapter for the Korean capital market. Previously, the KOSPI reached the 'KOSPI 5000' milestone for the first time ever on January 22, then surpassed 'KOSPI 6000' on February 25. Afterward, it exceeded 'KOSPI 7000' and 'KOSPI 8000' on May 6 and 15, respectively, and finally broke the 'KOSPI 9000' barrier on this day. It is natural for investors to flock to the market when stock prices rise. However, some point out that behind this frenzy, there is a 100 trillion won pile of debt, which could become a risk factor for the market going forward.

The Era of 'Leverage Investment': Individuals Borrow to Buy Stocks, Securities Firms Also Borrow to Lend

Some individual investors do not purchase stocks solely with their own funds. If they lack enough money, they can borrow from securities firms to buy more shares. This is commonly referred to as 'leverage investment' (investing with borrowed money). For example, if someone has 1 million won and borrows an additional 500,000 won, they can buy stocks worth 1.5 million won. If the share price rises, the profit increases by a factor of 1.5. Of course, the opposite is also true: if the share price falls, the loss is amplified by 1.5 times as well. Both gains and losses are magnified in proportion to the amount borrowed.

As individual investors' leverage investment increases, securities firms themselves also need to take on debt. This is because the money demanded by investors cannot be covered by the firms' own reserves alone. It is a structure where securities firms borrow money in order to lend it out again.

According to Shin Young Securities, the scale of leverage investment is currently at an all-time high. The outstanding balance of margin loans—money borrowed by investors from securities firms—has reached 37 trillion won.

One of the places securities firms borrow money from is the short-term money market. They raise funds by issuing CP (commercial paper) and ECP (electronic short-term bonds), which are short-maturity debt instruments. The balance of CP and ECP held by securities firms, which stood at 44 trillion won at the beginning of last year, jumped to 63 trillion won at the start of this year, and for the first time surpassed 100 trillion won on June 2.

Concerns Over Short-Term Money Market Disruption? Optimism That Regulation Acts as a Brake

When debt grows rapidly, the market naturally becomes tense. This is because it brings back memories of the so-called 'liquidity crunch' in the short-term money market that used to strike suddenly at the end of each year. If lenders close their wallets all at once, even healthy companies can stumble due to a sudden lack of funds.

Nevertheless, Lee Kyung-rok, a researcher at Shin Young Securities, believes that the current scale of leverage investment represents 'managed risk.' In a report titled "Review of June Short-Term Credit Market Risk Factors," he stated, "With legal regulations on the supply side and liquidity on the demand side supporting the market, the probability of a sudden supply-demand imbalance triggering market shocks in the near term is low." In other words, regulations and demand are minimizing the magnitude of risk.

The Capital Markets Act limits the total amount that large securities firms (investment trading companies with capital of at least 3 trillion won) can lend to 200% of their own capital. Of this, the amount that can be lent to individuals cannot exceed 100% of their own capital. Even if securities firms are eager to meet the surging demand for leverage investment, the law has set a ceiling.

Moreover, securities firms usually maintain a buffer of about 20–30% below this ceiling to avoid hitting the limit directly. However, as leveraged investment has surged, the buffer has indeed narrowed. In fact, some major securities firms have temporarily halted new margin loans after reaching their lending limits. Since they are unable to lend more, the scale of fundraising through short-term bonds cannot increase indefinitely either. Thus, regulation has effectively become a brake to prevent overheating.

The researcher also points out that the demand side of leverage investment needs to be monitored. The sources that replenish the funds used for leverage investment are short-term financial instruments such as MMFs (Money Market Funds) and CMAs (Cash Management Accounts). If these reservoirs run dry, even if securities firms issue more short-term bonds, there will be fewer buyers.

June is the last month of the half-year, a period when such funds tend to temporarily shrink. This year, the market experienced a temporary and strong drain on short-term funds due to the overlapping maturity of large amounts of government bonds. However, the researcher assessed this as "a recurring temporary phenomenon every year." In the long term, he noted, the reservoir of short-term funds is steadily being replenished.

In conclusion, with regulation supporting the supply side and liquidity underpinning the demand side, the probability of a major shock in the current credit market is deemed low. The researcher concluded, "The current concerns about the credit market are unlikely to develop into a systemic risk for the short-term credit market."

This content was produced with the assistance of AI translation services.