KB News Desk
Backlash over leveraged exchange-traded funds has the Financial Services Commission treading more cautiously on further capital market reforms, putting two planned market initiatives at risk of delay.
The Korea Exchange’s fractional investment market, scheduled to open in November, is increasingly likely to be postponed, according to financial industry sources Tuesday. Nextrade’s plan to begin after-hours ETF trading this year has also stalled.
Industry officials said the regulator is reassessing investor-protection and market-stability risks of introducing new trading platforms after facing political and public criticism over leveraged ETFs.
Fractional market lacks products
The Korea Exchange, or KRX, planned to open its fractional investment market Nov. 16, following mock trading from Oct. 6 through Nov. 13. The FSC, however, has yet to make a final decision.
A shortage of eligible products is a key concern.
Consortiums led by Korea Digital eXchange and Nextrade are separately seeking licenses to operate over-the-counter platforms for nonmonetary trust beneficiary certificates, placing them in potential competition with the KRX market.
Opening the exchange-run market first could concentrate the limited supply of products and liquidity on one platform, making it harder for the over-the-counter operators to gain a foothold.
“The exchange has told fractional investment companies that there are not enough products available for trading,” an industry official said. “With such a limited initial lineup, it appears difficult for the FSC to make a decision.”
The official nevertheless argued that the market should open on schedule, given the lengthy preparations already undertaken.
The KRX received a regulatory sandbox designation for the market in December 2023. The designation lasts two years and may be extended once for up to another two years.
Nearly three years after receiving the designation, the exchange is facing pressure to avoid another delay.
After-hours ETF trading stalls
The regulatory caution has also affected plans to introduce ETF trading outside regular market hours.
Extending ETF trading raises additional challenges for liquidity providers, including managing tracking errors, calculating real-time indicative net asset values and handling creations, redemptions and hedging.
Nextrade’s plan has effectively been shelved for this year while regulators and market operators assess those risks.
The KRX’s own after-hours market, scheduled to open Oct. 14, will also exclude ETFs and exchange-traded notes.
Under rule changes proposed last week, the exchange would bar ETFs, ETNs and other securities deemed to require additional investor protection or market oversight from the new session.
Another industry official said the backlash over leveraged ETFs had made the FSC reluctant to move forward with potentially contentious policies.
“The FSC has become far more cautious after facing heavy criticism,” the official said. “It is approaching new capital market policies in a way that leaves as little room for controversy as possible.”
