The South Korean government is preparing supplementary measures for single-stock leveraged exchange-traded funds (ETFs) following President Lee Jae-myung's directive for additional policies beyond measures announced on July 21. The government is working with the Capital Market Research Institute to develop medium- and long-term policies addressing volatility caused by liquidity providers' rebalancing trades concentrated during the closing auction period from 3:20 to 3:30 PM. Financial Supervisory Service Governor Lee Chan-jin stated on July 21 after a cabinet meeting that improved supplementary measures are needed, while the government focuses on creating a stable investment environment and limiting investment demand for single-stock leveraged products.
Government Accelerates Policy Development Timeline
According to financial authorities and the financial investment industry on July 22, the government is preparing additional supplementary measures for single-stock leveraged ETFs in collaboration with the Capital Market Research Institute. The government plans to prepare a draft this month and consult with the presidential office before releasing medium- and long-term market stabilization measures. The focus is on strengthening basic deposit requirements and creating an environment for single-stock leveraged investment without major disruption while limiting investment demand. FSS Governor Lee Chan-jin reportedly stated at an internal executive meeting after the July 21 cabinet meeting that more improved supplementary measures for leverage products are needed.
Proposed Measures Include Mandatory Rebalancing Time Dispersion
Industry experts expect the supplementary measures to include mandatory time dispersion for liquidity providers' rebalancing trades, account-level investment limits, and age restrictions. Rebalancing time changes were raised multiple times by the industry but were not reflected in the first round of measures. FSC Capital Market Bureau Director Byun Je-ho stated at a briefing on July 16 that "some argued rebalancing (trading time) should be dispersed, but we did not introduce it." Currently, single-stock leveraged ETF rebalancing time is left to industry discretion, and the Korea Exchange has no separate regulations or detailed rules related to rebalancing time. This has led to criticism that trades concentrated during the closing auction period increased product volatility, prompting analysis that mandatory dispersion of orders concentrated during the auction period to other times during trading hours is necessary.
Investment Caps and Age Restrictions Under Consideration
Measures to set account-level investment limits for single-stock leveraged ETFs are also being discussed, as the investment risk and potential for losses are higher due to the lack of a diversified investment structure compared to regular ETFs. For example, if an investor has 100 million won to invest in stocks, they could be limited to investing only up to 10% in single-stock leveraged products. Alternatively, leveraged trading volume could be limited relative to the underlying stock's trading volume. An ETF management division head at a major asset management company stated, "Since we created an investment hurdle by raising the basic deposit, setting a maximum investment limit for single-stock leveraged products is one method," adding "even if an investor has 100 million or 200 million won, capping the maximum investment like a domestic stock return investment account (RIA) could reduce (fund) inflows." Age restrictions are also suggested considering the high investment uncertainty from tracking ±2x returns of a single stock. Currently, anyone with a stock account who completes education for single-stock leveraged investment and meets deposit standards can trade these products, meaning minors under 20 with relatively less investment experience could suffer significant losses by investing hastily. Periodic implementation of investor education programs, currently conducted only once, is also being considered.
Leverage Ratio Adjustments and Delistings Deemed Unrealistic
Adjusting the 2x leverage ratio or delisting products, raised by some, are considered unrealistic. Reducing the leverage ratio from 2x to 1.5x would require investor consent, which is unlikely given most investors are experiencing significant losses. Delisting would not only undermine policy consistency but could also cause loss of trust in South Korea's stock market externally.
FAQ
Q: What measures did President Lee Jae-myung direct the government to prepare for single-stock leveraged ETFs?
A: President Lee Jae-myung directed the government to prepare supplementary measures beyond those announced on July 21. The government is working with the Capital Market Research Institute to develop medium- and long-term policies addressing volatility from concentrated rebalancing trades during the closing auction period from 3:20 to 3:30 PM.
Q: What specific policy proposals are being considered for single-stock leveraged ETFs?
A: Policy proposals include mandatory time dispersion for liquidity providers' rebalancing trades, account-level investment limits (such as capping single-stock leveraged investments at 10% of total stock investments), age restrictions for investors, and periodic investor education programs. The government is preparing a draft this month for consultation with the presidential office.
Q: Why are leverage ratio adjustments and delistings considered unrealistic options?
A: Reducing the leverage ratio from 2x to 1.5x would require investor consent, which is unlikely given most investors are experiencing significant losses. Delisting would undermine policy consistency and could cause loss of trust in South Korea's stock market externally.
