〈Case in which the issues included the validity and scope of application of a clause in terms and conditions providing for intraday liquidation by an investment broker in overseas derivatives market transactions, and whether the investment broker breached its duty of care as a good manager〉

【Holding】

[1] Where the terms and conditions of an account opening agreement that an investor concluded with an investment broker in order to trade derivatives, or the like, provide that, where the value of the investor's holdings such as derivatives falls below a certain margin level due to a sharp intraday price movement, the investment broker may liquidate the investor's derivatives and the like through offsetting transactions without a margin call, whether such ‘intraday liquidation’ by the investment broker constitutes discretionary trading exceptionally permitted under Article 7(4) of the Financial Investment Services and Capital Markets Act and Article 7(3) subparagraph 3 of the Enforcement Decree of the same Act (affirmative)

[2] In the case of a European-style option, under which the buyer may exercise the right only at expiration, whether terms and conditions may be adopted allowing the investment broker to conduct intraday liquidation where concern over the risk of settlement default at expiration has heightened, such as where the amount of consignment margin falls far short of the expected settlement amount due to a sharp intraday price movement (affirmative)

[3] The standard for determining whether an investment broker that has been entrusted with the authority to liquidate an investor's derivatives and the like in the event of a margin shortfall in connection with the investor's derivatives transactions breached its duty of care as a good manager in the course of exercising that authority / Whether it can be said that the investment broker breached its duty of care as a good manager merely on the basis of circumstances such as that, in hindsight, there was an opportunity to conduct the liquidation on better terms than the actual result of the liquidation (negative in principle)

[4] In a case where asset management company A, which established a fund that is a professional-investor-type private collective investment vehicle in the form of an investment trust, and trust business entity B and others, which were entrusted by Company A with the investment trust assets of the fund, concluded an account opening agreement with investment broker C and opened an account in order to trade overseas derivatives in the name of Company C, and then invested the investment trust assets in put options on the Nikkei Index (Nikkei 225 Index), an overseas derivative; when the appraised value of the assets in the account, which held a large number of short put option positions, fell sharply due to a steep decline in the Nikkei Index and fell below 20% of the consignment margin, Company C liquidated the Nikkei Index put options and the like in the account through offsetting transactions pursuant to a clause in the terms and conditions of the account opening agreement providing that ‘where the customer's total appraised consignment amount falls below 20% of the consignment margin due to a sharp intraday price movement or the like, open positions may be disposed of by liquidation without a margin call for additional consignment margin,’ and then sought payment of the settlement amounts it had paid on their behalf and the like from Company A, Company B, and others, while Company A, Company B, and others disputed the lawfulness of the liquidation and, by counterclaim, sought damages equivalent to the deposits lost through the liquidation, the Court held that the lower court's judgment, which held otherwise, erred in misapprehending the relevant legal principles, since the investment broker's intraday liquidation under the above clause of the terms and conditions constitutes discretionary trading exceptionally permitted under the Financial Investment Services and Capital Markets Act and its Enforcement Decree; the Nikkei Index put options, which are European-style options, must be regarded as being included in the objects of intraday liquidation under the above clause; if the total appraised consignment amount is calculated by reflecting real-time price movements around the time the liquidation was carried out, there is considerable room to find that the requirements for intraday liquidation were satisfied at the time of the liquidation; and Company C cannot be said to have breached its duty of care as a good manager in the course of carrying out the liquidation

【Summary of Decision】

[1] Article 71 subparagraph 6 of the Financial Investment Services and Capital Markets Act (hereinafter the ‘Capital Markets Act’) prohibits, in principle, an investment broker from being entrusted by an investor with all or part of the investment decisions regarding financial investment instruments and acquiring, disposing of, or otherwise managing financial investment instruments separately for each investor (hereinafter ‘discretionary trading’), while exceptionally permitting, in addition to cases conducted as a discretionary investment business, acts whereby, under Article 7(4) of the Capital Markets Act and Article 7(3) subparagraph 3 of the Enforcement Decree of the Financial Investment Services and Capital Markets Act (hereinafter the ‘Enforcement Decree of the Capital Markets Act’) enacted under delegation thereof, where an investor fails to perform settlement following the sale, purchase, or other transaction of financial investment instruments, the additional deposit of margin, or the obligation to maintain the collateral ratio or the obligation of repayment in connection with the extension of credit under Article 72 of the Capital Markets Act, the investment broker, without separate consideration from the investor, is entrusted under the terms and conditions or the like with the authority to sell the financial investment instruments (including, in the case of derivatives, the authority to purchase derivatives already sold) and acquires, disposes of, or otherwise manages those financial investment instruments.

Where the terms and conditions of an account opening agreement that an investor concluded with an investment broker in order to trade derivatives, or the like, provide that, where the value of the investor's holdings such as derivatives falls below a certain margin level due to a sharp intraday price movement, the investment broker may liquidate the investor's derivatives and the like through offsetting transactions (hereinafter ‘intraday liquidation’), the interpretation faithful to the legislative intent and the statutory text is that such a transaction constitutes discretionary trading as provided in Article 71 subparagraph 6 of the Capital Markets Act, in that the investment broker is entrusted by the investor with investment decisions as to the quantity, price, timing, and the like of the acquisition or disposal of derivatives and the like and performs the acquisition, disposal, or the like accordingly. However, an investor who does not wish offsetting transactions in the derivatives and the like it holds to be carried out under such terms and conditions must manage its holdings so that the value of its derivatives and other holdings does not fall below the certain margin level, and, where the value has fallen below the certain margin level due to a sharp intraday price movement, must take measures such as promptly making an additional deposit sufficient to make up the shortfall even without receiving a margin call from the investment broker. Such ‘intraday liquidation’ by the investment broker is a transaction of derivatives and the like carried out under the authority to sell and purchase derivatives and the like entrusted by the investor in a case where the investor, although required to make an additional deposit of margin following its derivatives and other transactions, failed to do so; therefore, it may be regarded as constituting discretionary trading exceptionally permitted under Article 7(4) of the Capital Markets Act and Article 7(3) subparagraph 3 of the Enforcement Decree of the Capital Markets Act enacted under delegation thereof.

[2] Derivatives include forwards, which are contracts agreeing to deliver, at a specified future time, money or the like calculated on the basis of an underlying asset or the price, interest rate, indicator, or unit of an underlying asset, or an index based thereon; futures, which are forwards standardized and traded on an exchange; and options, which are contracts agreeing to grant a right whereby a transaction for the payment of money or the like calculated on the basis of an underlying asset or the price, interest rate, indicator, or unit of an underlying asset, or an index based thereon, may be brought into existence by a declaration of intent of either party (Article 5(1) subparagraphs 1 and 2 of the Financial Investment Services and Capital Markets Act). Options may be divided, according to when the right can be exercised, into European-style options, which may be exercised only at expiration, and American-style options, which may be exercised at any time before expiration. In the case of a European-style option, the right to bring into existence the transaction provided for in the option can be exercised only upon reaching expiration, and thus the risk of settlement default by a party to the transaction does not materialize before expiration arrives. However, even before the expiration of a European-style option, where, due to a sharp price movement, the likelihood increases that the investor will have to make at expiration a large settlement beyond its capacity, while the investor's consignment margin falls far short of the expected settlement amount, so that concern over the risk of settlement default at expiration has heightened, the investment broker needs to take measures to prevent the materialization of the settlement default risk and the occurrence of greater losses, and it must be held that terms and conditions concerning intraday liquidation may be adopted for that purpose.

[3] An investment broker bears, under Article 37(1) of the Financial Investment Services and Capital Markets Act (hereinafter the ‘Capital Markets Act’), the duty to conduct its investment brokerage business fairly in accordance with the principle of good faith, and where it breaches that duty or neglects its business and thereby causes loss to an investor, it is liable for damages under Article 64(1) of the Capital Markets Act. Even where an investment broker, having been entrusted with the authority to liquidate an investor's derivatives and the like in the event of a margin shortfall in connection with the investor's derivatives transactions, exercises that authority, it bears the duty to exercise the care of a good manager so as to keep the investor's losses to a minimum. In such a case, whether the investment broker breached its duty of care as a good manager must be determined on the basis of whether the investment broker, as a professional, can be regarded as having made a reasonable judgment, taking into account various circumstances such as the cause of the sharp decline in the appraised value of the derivatives and the price outlook, the amount of the margin shortfall and the scale of the disposal carried out to make it up, the market conditions and order method at the time the liquidation was carried out, and whether the investor was aware of the sharp price movement and the possibility of liquidation. However, since it is practically impossible even for an investment broker that is a professional to accurately predict the prices of derivatives, which are highly uncertain and volatile, the investment broker cannot be said to have breached its duty of care as a good manager merely on the basis of circumstances such as that, in hindsight, there was an opportunity to conduct the liquidation on better terms than the actual result of the liquidation, unless there are special circumstances such as that the price of the derivatives subject to liquidation showed a clear tendency to fall or rise so that it could be predicted with certainty that there would be a trading opportunity to minimize the investor's losses.

[4] In a case where asset management company A, which established a fund that is a professional-investor-type private collective investment vehicle in the form of an investment trust, and trust business entity B and others, which were entrusted by Company A with the investment trust assets of the fund, concluded an account opening agreement with investment broker C and opened an account in order to trade overseas derivatives in the name of Company C, and then invested the investment trust assets in put options on the Nikkei Index (Nikkei 225 Index), an overseas derivative; when the appraised value of the assets in the account, which held a large number of short put option positions, fell sharply due to a steep decline in the Nikkei Index and fell below 20% of the consignment margin, Company C liquidated the Nikkei Index put options and the like in the account through offsetting transactions pursuant to a clause in the terms and conditions of the account opening agreement providing that ‘where the customer's total appraised consignment amount falls below 20% of the consignment margin due to a sharp intraday price movement or the like, open positions may be disposed of by liquidation without a margin call for additional consignment margin,’ and then sought payment of the settlement amounts it had paid on their behalf and the like from Company A, Company B, and others, while Company A, Company B, and others disputed the lawfulness of the above liquidation and, by counterclaim, sought damages equivalent to the deposits lost through the liquidation, the Court held that the lower court's judgment, which held otherwise, erred in misapprehending the relevant legal principles, on the following grounds: ① the investment broker's intraday liquidation under the above clause of the terms and conditions constitutes discretionary trading exceptionally permitted under Article 7(4) of the Financial Investment Services and Capital Markets Act and Article 7(3) subparagraph 3 of its Enforcement Decree; ② even in the case of European-style options, there is a need to take intraday liquidation measures in preparation for a situation in which the risk of settlement default at expiration surges and greater investment losses occur, and even if the explanatory document that Company C provided to Company A, Company B, and others in order to explain the risks and the like of overseas derivatives transactions stated only ‘(overseas) futures,’ this cannot be interpreted as excluding ‘(overseas) options,’ including European-style options, from the objects of intraday liquidation, so that the Nikkei Index put options, which are European-style options, must be regarded as being included in the objects of intraday liquidation under the above clause; ③ taking together the purport of the above clause and the content of the explanatory document, the ‘total appraised consignment amount’ in the above clause means, in the same way as the ‘total appraised deposit amount,’ the sum of the cash remaining in the investor's account, the appraised value of substitute securities, and the appraised value of open positions, of which the appraised value of open positions must be calculated in a manner that reflects in real time the price movements of the derivatives held by the investor, and if the total appraised consignment amount of Company A, Company B, and others is calculated by reflecting real-time price movements around the time the liquidation was carried out, there is considerable room to find that the requirements for intraday liquidation were satisfied at the time of the liquidation; and ④ in light of all the circumstances, such as the market conditions, the scale of the disposal, and the order method at the time the liquidation was carried out, Company C cannot be said to have breached its duty of care as a good manager in the course of carrying out the liquidation.

【Referenced Statutes】

[1] Article 7(4) and Article 71 subparagraph 6 of the Financial Investment Services and Capital Markets Act, Article 7(3) subparagraph 3 of the Enforcement Decree of the Financial Investment Services and Capital Markets Act [2] Article 5(1) subparagraphs 1 and 2 of the Financial Investment Services and Capital Markets Act [3] Articles 37(1) and 64(1) of the Financial Investment Services and Capital Markets Act [4] Article 5(1) subparagraphs 1 and 2, Article 7(4), Article 37(1), Article 64(1), and Article 71 subparagraph 6 of the Financial Investment Services and Capital Markets Act, Article 7(3) subparagraph 3 of the Enforcement Decree of the Financial Investment Services and Capital Markets Act

【Referenced Precedents】

[3] Supreme Court Decision 2000Da50312, January 10, 2003 (Gong 2003Sang, 576)

(Source : Supreme Court Decision 2024Da215375, 215382, March 13, 2025 | Judicial Information Disclosure Portal, Precedents)