Korea scrambles to rein in single-stock leveraged ETFs
Top economic policymakers pose before a market conditions review meeting at the Korea Federation of Banks in Seoul, Thursday. From left are Financial Supervisory Service Gov. Lee Chan-jin, Bank of Korea Gov. Shin Hyun-song, Finance Minister Koo Yun-cheol and Financial Services Commission Chairman Lee Eog-weon. Courtesy of the Ministry of Finance and Economy
Korea is preparing measures to curb speculation in single-stock leveraged exchange-traded funds (ETFs) after daily turnover topped 18 trillion won ($12.14 billion) and some products lost more than half their value this month, industry officials said Thursday.
Potential measures are expected to be announced soon by the country's top economic policymakers, collectively known as the F4. The group comprises the Ministry of Finance and Economy, the Financial Services Commission, the Financial Supervisory Service and the Bank of Korea.
The regulatory push gathered pace after President Lee Jae Myung raised the issue at a policy briefing Wednesday and urged financial regulators to "quickly put together well-crafted follow-up measures."
The securities industry has also begun developing its own safeguards. The Korea Financial Investment Association (KOFIA) and 10 major brokerages held an emergency meeting Tuesday and agreed to draw up self-regulatory measures for the products.
One proposal would raise the minimum deposit required to trade single-stock leveraged ETFs from the current 10 million won. The KOFIA is also considering broader mandatory investor education and risk warnings tailored to factors such as age and investment profile.
Brokerages will review ways to strengthen the market stabilizing role of liquidity providers and spread rebalancing transactions over longer periods. Trades concentrated shortly before the market close have raised concerns that the products are amplifying swings in their underlying shares.
"The products can broaden investment options and help develop Korea's capital markets by catering to a wider range of strategies and risk appetites. It would be preferable to keep such demand, where investors are covered by local safeguards, rather than push it overseas," the KOFIA said in a statement after the meeting.
"Still, stronger protections were needed after demand since the products' launch exceeded initial expectations. Leveraged products can magnify losses over short periods and may also generate losses in sideways markets because of the effects of daily compounding."
Calls for tighter oversight intensified as signs of market overheating are increasing. Turnover in 16 leveraged and inverse ETFs tied to Samsung Electronics and SK hynix reached 18.27 trillion won, Tuesday, accounting for about 39 percent of total ETF trading.
The volatility has already produced steep losses. When SK hynix shares tumbled 15.37 percent on Monday, leveraged products tracking the chipmaker fell as much as 31.46 percent in a single session.
Industry officials broadly support stronger safeguards but warned that overly restrictive rules could push local investors toward similar products listed overseas. Triple-leveraged products tracking Samsung Electronics and SK hynix trade in the U.K., while U.S.-listed ETFs linked to Samsung Electro-Mechanics and Hyundai Motor could launch as early as August.
"Recent volatility reflects a combination of factors, including not only the rebalancing of leveraged ETFs but also the macroeconomic backdrop and swings in global semiconductor stocks," an industry official said. "Finding a clear solution may prove difficult, as policymakers seek to balance investor protection with the need to preserve market functioning."