In an effort to lower consumer risks caused by the overheated equity-linked securities market, South Korea’s financial regulator said Thursday it will impose tighter regulations on leverage ratio of brokerages, which would lead to a decline in overall issuance here.

ELS refers to hybrid debt instruments structured to track the performance of underlying equities, including the Kospi 200 Index. Total ELS issuances here surpassed 100 trillion won ($83.7 billion) as of this year, attracting some 950,000 retail investors, industry data showed. 

When it comes to calculating the ratio of equity capital to total assets -- dubbed leverage ratio -- the financial authorities will count the ELS products that account for 50 percent or more of the firms’ capital as debts, while increasing the debt ratio in line with the ELS issue amount, according to the Financial Services Commission. 

The move came as some ELS products based on foreign stock markets saw heavy losses amid an overall plunge during March triggered by the coronavirus pandemic. This led to massive margin calls, putting local brokerages in a liquidity crunch, officials said. 

Through the new regulation, the FSC expects the domestic securities firms to refrain from expanding ELS sales in a bid to maintain sound leverage ratio. In Korea, securities firms are advised to maintain their leverage ratio of 1,300 percent or below, otherwise they receive a disciplinary warning from the financial regulators.

Meanwhile, the authorities had previously planned to obligate brokerages to issue ELS products in a way their total amount remains a maximum of two times their equity capital. The plan, however, was toned down to leverage ratio regulation after facing a strong backlash from the market. 

The new leverage rule will take effect in 2022 after the government revises related regulations on financial investments. 

By Choi Jae-hee (cjh@hearldcorp.com)