KB News Desk
South Korea’s brokerage industry has agreed to tighten investor protection rules for single-stock leveraged exchange-traded funds after the products came under criticism for amplifying market volatility.
The Korea Financial Investment Association on Tuesday convened an emergency meeting of major brokerage CEOs to review market conditions surrounding leveraged ETFs tracking Samsung Electronics and SK hynix and discuss industry-led measures.
The firms agreed in principle to raise the minimum deposit requirement to curb excessive leverage by retail investors. One proposal under review would increase the threshold from 10 million won to 50 million won ($6,700 to $33,500). They also agreed to introduce more tailored risk warnings based on investors’ age and portfolio, 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 investors back from overseas markets. However, strong retail demand has fueled concerns that the funds are exacerbating volatility in the Kospi.
Brokerages and asset managers have already been disclosing product risks, issuing investment warnings and avoiding aggressive marketing. But firms agreed additional safeguards are needed as demand has far exceeded initial expectations.
Details, including when the measures will take effect and whether higher deposit requirements will apply to existing investors, have yet to be decided.
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 follows growing concern 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 is 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 and ban asset managers from advertising or promoting single-stock leveraged products.”
