President Lee Jae Myung on Wednesday ordered swift measures to address concerns over single-stock leveraged exchange-traded funds tied to Samsung Electronics and SK hynix, adding momentum to efforts to tighten safeguards for the products.
Lee directed the Korea Exchange to quickly prepare supplementary measures and told Financial Supervisory Service Gov. Lee Chan-jin that the regulator appeared to have come under pressure over the ETFs.
The remarks are expected to accelerate the government’s review of additional safeguards. Presidential Chief of Staff for Policy Kim Yong-beom earlier said the government’s F4 policy coordination group — comprising the Ministry of Economy and Finance, the Financial Services Commission, the Bank of Korea and the Financial Supervisory Service — was reviewing the products’ market impact and would consider further measures if needed.
Separately, the Korea Financial Investment Association convened an emergency meeting of major brokerage CEOs on Tuesday to discuss industry-led measures.
The firms agreed in principle to raise the minimum deposit requirement to curb excessive leveraged exposure by retail investors. One proposal under review would increase the threshold fivefold, from 10 million won to 50 million won ($6,700 to $33,500).
They also agreed to introduce risk warnings tailored to investors’ ages and investment portfolios and expand investor education so buyers better understand the products’ structure and risks.
The Samsung Electronics and SK hynix 2x leveraged ETFs, listed on May 27, were introduced to bring domestic trading demand back from overseas markets. However, strong retail inflows have fueled concerns that the funds are amplifying volatility in the underlying stocks and, by extension, the Kospi.
Brokerages and asset managers have already strengthened risk disclosures, issued investment warnings and refrained from aggressive marketing. Even so, participants agreed that additional safeguards were needed after demand far exceeded expectations.
Key details, including when the measures will take effect and whether the higher deposit requirement will apply to existing investors, have yet to be finalized.
The industry also agreed to spread rebalancing and hedging trades more evenly throughout the trading day to reduce concentrated buying and selling pressure near the market close.
The move comes as concerns grow over the scale of end-of-day rebalancing. The Korea Capital Market Institute estimates the ETFs have generated between 700 billion won and 2.1 trillion won in daily rebalancing trades since their launch in May.
“We hope that by further strengthening each firm’s investor protection efforts and supplementing some regulations, we can foster a market environment that investors can trust,” said Whang Song-youp, chairman of the Korea Financial Investment Association.
Industry officials broadly welcomed the proposals but said further tightening was needed.
“Deposits should be cash only. Right now, stock holdings also count toward the requirement, which undermines the purpose of raising the threshold,” one industry official said.
“Regulators should also strengthen investor education requirements and prohibit asset managers from advertising or promoting single-stock leveraged products.”
ch0221@heraldcorp.com