The Financial Services Commission announced that the government and related authorities have prepared and unveiled a set of measures intended to improve the management of single-stock leveraged products (exchange-traded funds and exchange-traded notes) at the joint market situation review meeting held on July 16.
Background
With various types of leveraged products available for trading in overseas markets, such as 3x leveraged products and single-stock leveraged products, from 2025, single-stock leveraged products having domestically listed stocks as underlying assets began to list in Hong Kong. Meanwhile, since there were no such products available in the domestic market, it was pointed out that domestic investors had no other option but to directly invest in these overseas listed products that provided relatively weaker levels of investor protection mechanisms. The rapid growth in the size of the overseas market presented concerns about the possibility of a continuously growing number of domestic investors making investments in these overseas listed products having domestically listed stocks as underlying assets. Therefore, the FSC sought to introduce single-stock leveraged products (ETFs and ETNs) in the domestic market by removing the regulatory inconsistency that existed between the domestic and overseas markets to make Korean capital markets more attractable and provide more diverse investment options for investors and to ensure the provision of strengthened investor protection mechanisms under the domestic regulatory framework for investing in single-stock leveraged products at home.
In this regard, the launch of single-stock leveraged products on May 27 this year had the effect of absorbing investment demand for similar products that are listed in the overseas market. However, as there appeared significant market expectation for share price increases in global memory chip companies, both the market capitalization and transactions value of single-stock leveraged products have soared rapidly. And this raised concerns over a potential expansion in share price volatility for global memory chipmakers, which had already seen their share prices pushed up significantly. At the same time, it also raised concerns about the possibility of greater losses being incurred to investors.
Against this backdrop, since the launch of single-stock leveraged products, the Ministry of Finance and Economy, the Financial Services Commission, the Financial Supervisory Service, and the Bank of Korea have been closely monitoring market situations and having in-depth discussions on the need to introduce improvement measures through the joint market situation review meeting held regularly, and at the meeting held on July 16, the authorities decided to announce a set of measures intended to strengthen the management of single-stock leveraged products.
Key Measures
The following measures have been prepared after considering the need to protect investors, foster market stability, and promote a greater level of efficiency in the market in a balanced way.
I. Cooling Excessive Competition in the Market (to take effect immediately)
Considering the rapidly increased demand in single-stock leveraged products in the domestic market, new listings of single-stock leveraged products including inverse and covered call products will be suspended temporarily. At the same time, securities firms and asset management companies will be prohibited from engaging in advertising and marketing activities for single-stock leveraged products that are already listed for transactions.
II. Improving Investor Protection Mechanisms
(1) Strengthening the management of premium/discount rates (for all ETFs and ETNs)
The management of premium/discount rates (also known as disparate ratios) will be tightened to ensure that leveraged products are not purchased at a higher price than the value of their underlying assets and sold at a lower price subsequently.
First, there will be measures to strengthen the responsibility of securities firms and asset management companies in managing the premium/discount rates (to take effect in August).
a) For securities firms (liquidity providers), the current premium/discount rate management duty of 3 percent will be strengthened to 2 percent.
b) If there is a violation of the management of premium/discount rates, there will be a regulatory ground established to authorize the Korea Exchange (KRX) to restrict the securities firm’s liquidity provision function on newly listed items.
c) To make asset management companies more responsible for the management of premium/discount rates, if a certain ETF fails to trade within an appropriate range of premium/discount rates set by the KRX, it may be considered to restrict new ETF listings by the asset management company responsible for the management of that particular ETF.
There will also be steps taken to improve the process for designating items to be included in the investment watchlist (which is expected to take effect in August).
Currently, there are three steps (from identification to preliminary designation to designation) that need to be taken to ultimately designate an item for investment watchlist, which then makes it possible to have single-price auction for the item. This makes it challenging to have swift responses even when an ETF’s premium rate surges intensively and makes it difficult to have appropriate price formation.
To improve upon this and to be able to more quickly respond to market situations and protect investors, the investment watchlist designation process will be streamlined (from the three-step process previously to a two-step process) for ETFs that repeatedly show disparate ratios that are twice or above the required disparate ratio.
(2) Bolstering the prior learning requirement and investor advisory notices
The prior learning requirement for investing in either domestically listed or overseas listed single-stock leveraged products will be strengthened.
Currently, making new investment in a domestically listed or overseas listed single-stock leveraged product requires an hour of prior learning session on ordinary leveraged products and an hour of intensive prior learning session on single-stock leveraged products for a total of two hours of prior learning sessions.
On top of this, an additional hour of in-depth prior learning session will be newly created to require investors to gain better understanding about current market conditions and specific cases and examples where losses have been incurred. With the introduction of an hour of in-depth prior learning session focusing on particular cases and examples, a total of three hours of prior learning will be required. At the same time, for each chapter, prospective investors will need to complete a more extensive level of questionnaires and score 60 percent or above to pass the test or otherwise relearn the chapter from the beginning.
The investor advisory notification system made available through the mobile trading system (MTS) of securities firms will also be improved (which is expected to come in place in August).
Securities firms’ mobile trading system (MTS) will be upgraded to automatically and periodically send out push notifications and advisory messages to investors who own single-stock leveraged products about a loss taking place and the rate of loss-making as long as they do not opt out of the notification system.
(3) Improving investment requirements to stabilize demand
The minimum deposit requirement will be enhanced for making investment in single-stock leveraged products to help stabilize investor demand for single-stock leveraged products. Since there exists a tendency of synchronized volatility across global semiconductor stocks lately and considering the need to protect investors and concerns over a spillover effect into overseas products, the increased minimum deposit requirement will apply equally to both domestically listed single-stock leveraged products and overseas listed single-stock leveraged products.
Currently, retail investors are required to deposit at least KRW10 million to make new investment in single-stock leveraged products (for both domestically listed and overseas listed). However, when calculating the minimum deposit amount, 70 percent of market values of substitute securities, such as stocks, ETFs (excluding leveraged ETFs), and bonds on the investor’s account was counted toward the deposit amount along with cash. Moreover, after three months of trading, securities firms would ordinarily have more leeway in lowering or strengthening the minimum deposit requirement for investors after taking into account the trading experience of investors.
To improve upon this and to make sure that investors are making new or additional investment in single-stock leveraged products (for both domestically listed and overseas listed) while being fully aware of the risk involved and having a sufficient level of risk tolerance, the minimum deposit requirement will be raised to KRW30 million (which is expected to take effect around August 5 this year). In addition, this newly set minimum deposit amount will only take into account cash and will not include substitute securities (which is expected to take effect around August 19 this year). This will mean that investors will need to have at least KRW30 million in cash regardless of their existing securities holdings when making new or additional investment in single-stock leveraged products (for both domestically listed and overseas listed). Additionally, for single-stock leveraged products (for both domestically listed and overseas listed), securities firms will no longer have leeway in allowing the easing of the minimum deposit amount for investors even after a certain period of trading (however, requiring a higher minimum deposit amount will still be possible).
Moreover, there will be an improvement sought for the minimum trading lot on single-stock leveraged products (which will take effect in November this year).
Currently, single-stock leveraged products are being issued and traded at prices that are similar to those of ordinary leveraged products, enabling investors to purchase them at lower prices compared to their underlying stocks.
To improve upon this and to make the price of single-stock leveraged products more realistically aligned to their underlying stocks, the current practice of one share per trading lot is expected to be raised to 20 shares per trading lot for domestically listed single-stock leveraged products.
Further Plan
The FSC and related authorities will work to ensure a swift implementation of these measures to quickly bring stability to the market. The measures that can be pursued by financial investment businesses on their own and the ones that require no revision to rules or system development will be implemented immediately. The measures that require a regulatory or system upgrade will take effect subsequently from August. To ensure investor protection, securities firms that fail to meet deadline for developing their own systems may be restricted from making new offerings of single-stock leveraged products.
The FSC and related authorities will continue to closely monitor market conditions and seek to draw up additional measures in close consultation and discussion with market experts and investors if considered to be necessary. At the same time, the FSC and related authorities will make continuous efforts to promote the KOSDAQ market, facilitate long-term investing practices, and introduce innovative financial products to bring about fundamental improvements to our capital markets.
* Please refer to the attached PDF for details.