Lead

South Korea's financial regulator has unveiled a set of measures targeting single-stock leveraged exchange-traded funds (ETFs) in response to extreme market volatility, according to reports from Yonhap News Agency. The measures, announced on July 16, include suspending the listing of new ETFs tracking Samsung Electronics and SK hynix, raising the minimum deposit requirement for single-stock leveraged ETFs to 30 million won (US$20,000) in cash only, and allowing investors to trade a batch of 20 shares in these ETFs, which the regulator says will reduce turnover.

The Financial Services Commission (FSC) said the steps are designed to ensure market stability and protect investors, as the country experiences extreme market swings. The leveraged ETFs, which debuted in May, multiply daily moves in underlying stocks by two times, contributing to the volatility. Retail investors have rushed into these products, drawn by the AI-driven bull run in Samsung Electronics and SK Hynix shares. The move follows President Lee Jae Myung's call for measures to stabilize the market.

Coverage Comparison

Reports from Yonhap News Agency and the South China Morning Post detail the regulatory actions. Both outlets emphasize the regulatory response to market volatility, with some coverage focusing on the proposed measures and others on the broader impact of leveraged ETFs on market instability. One Yonhap report notes that Samsung Electronics and SK Hynix shares fell despite record chip profits, highlighting how single-stock leveraged ETFs are amplifying volatility across Korea's market. The South China Morning Post report similarly suggests that these products have come under scrutiny for amplifying market volatility, particularly after retail investors who bought near the peak suffered steep losses.

Different reports place the causal attribution for the volatility on the leveraged ETFs, with some analysts arguing the products have mainly contributed to greater market instability. However, one report from the Yonhap News Agency quotes regulators arguing that recent market volatility is driven primarily by global uncertainty, implying the leveraged ETFs are not the only factor.

The timing of the measures also varies in the reports. The initial set of measures was announced on July 16, with the minimum deposit hike effective from early August. Later reports from July 29 indicate that authorities are also considering imposing a cap on the proportion of single-stock leveraged ETFs in individual investment portfolios, with a possible threshold of 20% of retail investors' portfolios, though no decision has been made on the threshold.

Key Claims

  • The minimum deposit requirement for single-stock leveraged ETFs will be hiked to 30 million won (US$20,000) in cash only, from the current 10 million won in mixed stocks and cash, according to reports from the Financial Services Commission.
  • The listing of new ETFs tracking Samsung Electronics and SK hynix will be temporarily suspended.
  • Investors will be allowed to trade a batch of 20 shares in the leveraged ETFs, which the regulator says will reduce turnover.
  • Single-stock leveraged ETFs are designed to deliver twice the daily return of an underlying stock, and they have been amplified market volatility.
  • South Korea's financial authorities are considering imposing a cap on the proportion of single-stock leveraged ETFs in individual investment portfolios, as discussed by Finance Minister Koo Yun-cheol and the heads of other financial authorities during an emergency meeting.
  • The measures follow President's Lee Jae Myung call to stabilize the market, and later, for a swift implementation.

Perspectives

Regulator Perspective

South Korea's financial authorities maintain that the measures are needed to ensure market stability and protect investors, attributing the volatility partly to the leveraged ETFs while also noting global uncertainty. They are prepared to take swift and bold countermeasures, including potentially capping these ETFs in portfolios.

Market Criticism Perspective

Critics argue that the measures are insufficient to address the structural problems of single-stock leveraged ETFs. They contend that the products, which require daily rebalancing, can create feedback loops that exacerbate market declines. They also argue that the concentration of the Samsung and SK Hynix stocks in the index, combined with the leveraged ETFs, has made the Korean market more volatile and prone to crashes.

Investor Protection Perspective

From the investors' perspective, the measures are likely intended to protect them from the risks of high-risk products, especially given the steep losses that many retail investors have suffered. Raising the minimum deposit and increasing trading unit can also be seen as discouraging inexperienced investors from taking excessive risks.