Korean brokerage firms plan to tighten single-stock leveraged ETF investment rules, and the minimum margin requirement may be raised by five times

The Korean securities industry reached an important consensus on investor protection for single-share leveraged ETFs, and the minimum deposit requirement may be raised to five times the current standard. This move directly points to recent market concerns about Samsung Electronics and SK Hynix leveraged funds increasing stock market fluctuations.

On the 15th, according to the “Korea Herald” report, the Korea Financial Investment Association convened an emergency meeting with CEOs of major brokerage firms on Tuesday to review the market conditions of these leveraged ETFs and discuss industry self-regulation measures. The participating institutions agreed in principle to raise the minimum deposit threshold to curb excessive leverage by retail investors. The plan is to raise the requirement from 10 million won (about 6,700 US dollars) to 50 million won (about 33,500 US dollars).

The relevant products have only been on the market for about two months, which has aroused a high level of alarm from the regulatory authorities and the industry. The Korea Capital Market Research Institute estimates that since the launch in May, the daily rebalancing transactions generated by these ETFs reached 700 billion to 2.1 trillion won, which had a concentrated impact on market liquidity near the closing period.

Background: The product was meant to attract local investors, and demand exceeded expectations

Samsung Electronics and SK Hynix's 2-fold leveraged ETF were listed on the Korea Exchange on May 27 this year. The original intention was to attract local investors back home from overseas markets. However, strong demand from retail investors far exceeded issuers' expectations, raising concerns about whether these two products are amplifying the volatility of the Korea Composite Stock Price Index (Kospi).

Brokerage firms and asset management companies have previously disclosed product risks, issued investment warnings, and restrained aggressive marketing practices, but the participating organizations believe that the existing measures are still insufficient and additional protection mechanisms must be introduced.

Main measures: Combining security deposit, risk warning and rebalance

According to the principle consensus reached at the conference, the industry plans to push forward rectification and reform in three directions:

First, raise the minimum deposit requirement from 10 million won to 50 million won to raise the entry threshold for retail investors; second, introduce more targeted risk warnings based on investors' age and portfolio conditions; and third, expand investor education to help buyers more fully understand the product structure and potential risks.

At the trading level, various institutions also agreed to spread rebalancing and hedging transactions more evenly throughout the day to ease the pressure of centralized trading near the close.

“We hope to create a market environment that investors can trust by further strengthening the investor protection efforts of various institutions and supplementing some regulations,” said Whang Song-youp, president of the Korea Financial Investment Association.

Focus of controversy: There are loopholes in the current rules, and industry figures are calling for stricter rectification

Although the industry generally welcomes the above plan, some industry insiders believe that the tightening is still insufficient.

“The security deposit shall be cash-only. Currently, stock holdings are also included in the calculation, which actually weakens the significance of raising the threshold,” an industry source said.

The source also suggested that regulators should strengthen investor education and prohibit asset management companies from advertising and promoting single-share leveraged products.

Currently, the details of implementation — including when the measures will take effect and whether the higher margin requirements will apply to existing investors — are yet to be determined.

This article is reprinted from “Wall Street News” by Zhang Yaqi; Zhitong Finance Editor: Chen Siyu