REPORTER’S NOTEBOOKRushed single-stock leveraged ETF rollout leaves questions of responsibility unanswered

Policymakers have yet to explain who decided to introduce single-stock leveraged exchange-traded funds (ETFs) or why their reviews were expedited, even as retail investors have sustained more than 2 trillion won ($1.5 billion) in losses on the products tracking Samsung Electronics and SK hynix. The funds have also drawn criticism for amplifying stock market volatility.

At a National Assembly audit Monday, Financial Supervisory Service (FSS) Gov. Lee Chan-jin acknowledged that the products underwent unusually rapid reviews to meet a policy timetable. But he offered no concrete explanation of who set that timetable or on what grounds.

These ETFs were made possible by a government decision to ease regulations. An amendment to the enforcement decree of the Capital Markets Act cleared the Cabinet on April 21.

The Financial Services Commission (FSC), the country’s top financial regulator, said at the time that the products could be listed as early as May 22. On May 15, it announced a planned listing date of May 27, and 16 products made their debut that day.

Monday’s audit raised questions about whether the reviews had been compressed to meet this schedule.

According to Rep. Park Dae-chul of the main opposition People Power Party (PPP), an ETF listing ordinarily proceeds through a preliminary review by the Korea Exchange, followed by an FSS review of its securities registration statement.

This time, the FSS began its work before the exchange had completed its review. A process that takes an average of 62 days, or 43 days for products tracking major indexes, took just 29 days for the single-stock leveraged ETFs, Park said.

Asked whether reviews of this kind were unprecedented, Lee replied, “I believe so.”

Regarding why they had been conducted that way, he said, “The FSC had announced a listing timetable as a policy matter. We expedited the reviews to meet that timetable.”

A shorter review does not, by itself, establish that scrutiny was inadequate. But there is a fundamental difference between setting a listing date after completing a review and making the review fit a predetermined listing date.

Retail investors suffered substantial losses following the launch. FSS data covering transactions at 10 brokerages showed that individual investors realized losses of 2.32 trillion won between the products’ debut on May 27 and Aug. 14.

Those losses alone do not prove that introducing the products was a mistake. Nor can the government be held responsible for every investment loss. But how authorities assessed investor safeguards and the market impact of allowing products that deliver a multiple of an individual stock’s daily returns is a separate question.

Still, the audit failed to establish who made the decision to proceed. Rep. Park Sung-hun of the PPP pressed Lee over his remark at a June press conference that he should have blocked the launch, asking whose decision he meant he should have opposed.

Lee replied, “I meant I should have blocked it before the securities registration statements were accepted.” He explained when he should have intervened, but not whose decision he should have challenged.

President Lee Jae Myung’s response at a Sept. 18 press conference was similarly ambiguous. He said he had been briefed that the aim was to redirect investment flows from overseas leveraged products tracking Samsung Electronics and SK hynix into the domestic market, thereby reducing demand for dollars.

The president acknowledged apparent shortcomings in the policy’s design. But on who had made the decision, he said, “Someone must have decided.”

Efforts to question key figures have also stalled. The ruling Democratic Party of Korea blocked opposition requests to summon witnesses, including former presidential chief of staff for policy Kim Yong-beom, whom the opposition suspects of involvement in the rollout.

FSC Chairman Lee Eog-weon denied that the presidential office ordered the move, but has yet to give a clear account of how the decision was made. The failure to summon key witnesses limited scrutiny further.

A policy’s stated purpose does not justify every step taken to implement it. Authorities must explain how they weighed the benefits of bringing investment flows home against the risks of leveraged products, and why the launch was urgent enough to warrant expedited reviews.

“Someone must have decided” is not enough.