Financial regulator chief faces criminal complaint as leveraged ETF backlash widens

Financial Services Commission Chairman Lee Eog-weon responds to a lawmaker's question during a plenary meeting of the National Assembly's National Policy Committee in Seoul, July 29. Yonhap

Financial Services Commission Chairman (FSC) Lee Eog-weon became the latest senior government official, Thursday, to face a criminal complaint over the rollout of single-stock leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK hynix, as criticism continues to grow over the high-risk products’ impact on recent market volatility.

Rep. Lee Jong-bae, a former Seoul Metropolitan Council member from the main opposition People Power Party, said he had filed the complaint with prosecutors, accusing the FSC chief of dereliction of duty and abuse of authority.

Lee alleged that the regulator approved the high-risk products without conducting sufficient due diligence, including stress tests designed to assess how they would perform under extreme market conditions.

“There is a possibility that Chairman Lee instructed FSC officials not to carry out stress tests. Had thorough testing been conducted, it might have revealed serious risks that would make it difficult to introduce the products before the local elections,” he said.

Single-stock leveraged ETFs, which allow investors to make amplified bets on the daily performance of individual companies, were launched on May 27, just a week before the June 3 local elections.

Presidential chief of staff for policy Kim Yong-beom speaks to reporters at Cheong Wa Dae in Seoul, July 22. Joint Press Corps

The filing comes just days after Lee lodged a separate complaint against presidential chief of staff for policy Kim Yong-beom, accusing him of pressuring financial authorities to fast-track approval of the ETFs.

And because the products were developed through discussions between the FSC and the Financial Supervisory Service (FSS) under the Lee Jae Myung administration, attention is now shifting to whether FSS Gov. Lee Chan-jin could face similar legal action.

Leveraged ETFs are designed to deliver two or three times the daily return of an underlying asset, typically a broad market index such as KOSPI or the S&P 500. Single-stock versions take that concept a step further, allowing investors to make amplified bets on the direction of an individual company rather than a diversified benchmark.

The products have come under fire since their debut over concerns that they could worsen swings in the broader market.

Samsung Electronics and SK hynix together account for more than half of KOSPI’s market capitalization. To maintain their promised leverage, the ETFs must adjust their holdings every trading day. Some argue that those routine buying and selling transactions can intensify moves in the two stocks, adding to volatility across the broader market.

KOSPI has swung sharply in recent sessions. After plunging 17.2 percent over the three trading days from July 28 to 30, the benchmark index posted a record one-day rebound of 17.9 percent on July 31. It has since steadied, trading in a relatively narrow 6,200-6,500 range this week.