Jun Ji-hye, a reporter at the finance desk of The Korea Times, focuses primarily on economic policy and government agencies, mainly covering the Ministry of Finance and Economy, the Ministry of Budget and Planning, the National Tax Service and the Korea Customs Service. She previously covered financial authorities, including the Financial Services Commission and the Financial Supervisory Service, and earlier worked on the political, city and business desks, reporting on a wide range of issues.
Tighter ETF rules likely as gov't moves to strengthen investor protection
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By Jun Ji-hye
Higher deposits, longer training among possible measures
The government and the ruling party are weighing tighter rules for single-stock leveraged exchange-traded funds (ETFs) linked to Samsung Electronics and SK hynix after the products came under fire for exacerbating volatility in the domestic stock market, according to industry officials Thursday.
With regulators signaling plans to strengthen investor protection and safeguard market stability, policymakers are expected to consider tightening investor eligibility requirements, lowering leverage limits, restricting approvals for new single-stock leveraged ETFs and strengthening oversight of fund size and rebalancing practices.
Heightened market volatility since the high-risk products were introduced is reflected in market data.
The KOSPI 200 Volatility Index, or VKOSPI, stood at 70.7 on May 27, when 14 leveraged ETFs and two inverse ETFs tracking the two major chipmakers, which together account for more than half of the KOSPI's market capitalization, began trading simultaneously. It had risen to 93.8 by June 30, exceeding the previous high of 89.3 reached during the 2008 global financial crisis.
The VKOSPI is Korea’s official volatility index and serves as a “fear gauge” for the stock market.
In response, Finance Minister Koo Yun-cheol said the government is reviewing ways to mitigate potential risks from the products, while Rep. Han Jeong-ae, policy chief of the ruling Democratic Party of Korea, pledged to examine whether additional investor-protection measures are needed.
Rep. Han Jeong-ae, policy chief of the ruling Democratic Party of Korea, speaks during a party meeting at the National Assembly in Seoul, Thursday. Yonhap
The comments suggest that regulatory changes are becoming increasingly likely.
One option under consideration is to tighten access for retail investors by introducing stricter eligibility requirements, including a qualified-investor system that would limit trading to investors with sufficient experience or financial resources.
Under the current framework, investors seeking to trade single-stock leveraged or inverse ETFs must deposit at least 10 million won ($6,660) and complete two hours of mandatory online training administered by the Korea Financial Investment Association.
“Regulators could consider raising the minimum deposit requirement, extending mandatory training and tightening qualification standards,” a capital markets source familiar with the discussions said.
Authorities are also weighing tighter restrictions on the products themselves, with potential measures including limiting approvals for new single-stock leveraged ETFs, strengthening concentration limits for underlying assets and reducing allowable leverage ratios.
In addition, oversight of fund management could be tightened by capping assets under management or introducing new guidelines for portfolio rebalancing near market close.
The measures are intended to reduce large, one-way trading flows that can amplify price swings in the underlying shares.
“The greater the price volatility of the underlying stock, the greater the rebalancing demand needed to maintain leverage, which in turn can further amplify price fluctuations,” said Shin Hyun-yong, an analyst at Yuanta Securities.
Jang Geun-hyuk, a senior research fellow at the Korea Capital Market Institute, noted that as assets under management increase, the amount of rebalancing required for the same level of price movement rises proportionally.
“If the current trend continues, rebalancing trades will account for a larger share of market turnover, increasing their influence on market volatility,” he said.
The Financial Services Commission, the country’s top financial regulator, has stopped short of acknowledging a policy failure, but said it is closely monitoring the market and reviewing possible measures to address any unintended effects.