Korea triples single-stock leveraged ETF deposit, requires full cash payment

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 Ministry of Finance and Economy

Korea will triple the minimum deposit for single-stock leveraged exchange-traded funds (ETFs) to 30 million won ($20,303) from the current 10 million won as regulators seek to curb speculative trading in the products.

Investors will be required to pay the full amount in cash. Previously, investors could meet up to 70 percent of the 10 million won deposit requirement with the value of stocks they already owned.

The measures were announced Thursday after the country's top economic policymakers, known collectively as the F4, agreed at a meeting in Seoul to tighten oversight of single-stock leveraged ETFs tracking Samsung Electronics and SK hynix. The group comprises the Ministry of Finance and Economy, the Financial Services Commission, the Financial Supervisory Service and the Bank of Korea.

Regulators agreed to temporarily halt new product launches, ban advertising for existing products and raise the minimum order size to 20 units from one until market conditions stabilize. They plan to strengthen risk-disclosure requirements and investor education as well.

At the same time, liquidity providers will face stricter requirements to prevent market prices from diverging excessively from underlying asset values. Current deviation limits are 3 percent for domestic stock ETFs and 6 percent for overseas products. Securities firms and asset managers that breach the rules will face tougher penalties.

The higher deposit requirement is set to take effect in August, while the change in minimum trading units will be implemented in November to give brokerages time to update their systems.

The regulatory push came after daily turnover exceeded 18 trillion won and some products lost more than half their value this month. The discussion 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."

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."

Thursday's package largely mirrors voluntary safeguards proposed by the securities industry, including higher minimum deposits and enhanced investor education.

Korea Financial Investment Association (KOFIA) and 10 major brokerages also agreed to examine ways to strengthen the market-stabilizing role of liquidity providers and spread rebalancing trades over longer periods. A concentration of transactions shortly before the market close has fueled concern 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 Tuesday emergency 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."