The fund management company Korea Fund Partners said it plans to fully compensate investors for the losses incurred due to errors in calculating the net asset value (iNAV) of domestic equity exchange-traded funds (ETFs) on the 28th of last month.
In the past, many asset management companies had been using information such as dividends and bond prices needed for calculating the iNAV received from Deputy Directors and others without independent verification. The general consensus in the industry was that asset managers should bear some responsibility for this situation, regardless of the scale of the damage. However, with Korea Fund Partners deciding to fully compensate, they have escaped liability.
As accidents continue to occur in the ETF market, financial authorities have also expressed their intention to conduct comprehensive investigations, while some interpret that the custodian, Korea Fund Partners, has taken on responsibility from the position of 'the second party.'
According to the financial investment industry on the 16th, Korea Fund Partners plans to calculate the specific transaction amount arising from the net asset value calculation error at the end of last month by this week at the latest and send the information to the relevant securities companies and asset managers. After that, each securities company will verify the losses of its customers and the compensation amount will be distributed from Korea Fund Partners in proportion to the scale of the damages.
On the 28th of last month, Korea Fund Partners excessively calculated the iNAV while reflecting dividend information for 170 ETFs from 11 asset managers. Before the errors were completely corrected by 12:40 p.m. following the market opening, the prices of the ETFs were inflated due to NAV being overestimated by at least 0.01% and up to 1.55%.
It takes a significant amount of time to calculate the exact transaction amount of losses incurred. This is because it is necessary to extract the second-by-second trading data of liquidity providers from securities firms based on the continuously changing iNAV and the actual net buying amounts of investors in ETFs. Additionally, it is not easy for the custodian, Korea Fund Partners, to receive account information from individual investors through securities firms.
As a result, Korea Fund Partners decided to share several reasonable calculation options with the securities companies and asset managers. The scale of the damage is reported to be in the range of 200 million won, but there is also a possibility that it may increase. An official from Korea Fund Partners said, “While the scale of the damage could exceed 200 million won, the possibility is not very high,” adding, “This incident is our responsibility, so we don’t see it as something to claim back from the asset managers and securities companies.”
Initially, the ETF industry expected that asset managers who failed to verify the reference price would also be held liable for compensation. However, the Financial Supervisory Service (FSS) has been intensifying its investigations into the asset management industry. In such a situation, there are criticisms that the custodian, being in a 'second party' role, is shouldering all the responsibility. An official from an asset management company stated, “Since this is the first large-scale error incident in ETF net asset value calculations, regardless of scale, it will be an important precedent regarding who will be held liable for compensation.”
From the custodian's perspective, which receives delegation from asset managers, there is also the risk of contract termination, making it realistically difficult to take a strong stance. In fact, Hanwha Asset Management has decided to change the custodian for six ETFs, including '1Q Money Market Active', to Hana Fund Services starting on the 17th. Some products from Hanwha Asset Management were included among those ETFs that experienced NAV errors last month. Regarding this, Korea Fund Partners explained that the change of custodian was made at the request of Hanwha Asset Management in February and is unrelated to last month's error.
An official from the Financial Supervisory Service stated, “While there was clearly a mistake on the part of the asset managers in failing to properly verify the reference price, it may not be easy for Korea Fund Partners to bring up issues of responsibility with the asset managers,” adding, “However, there may still be a need to receive at least some compensation due to issues of breach of trust.”
Recently, the Financial Supervisory Service (FSS) requested domestic asset managers to submit materials related to ETF structures and transaction details, indicating they would generally review the asset management industry. In relation to this net asset value error incident, the FSS plans to guide asset managers to strengthen the management of Deputy Directors and reference price calculations.