The Financial Supervisory Service said it will review the need to improve regulations after some asset managers recently disclosed, ahead of launch, the portfolio components of their own KOSDAQ active exchange-traded funds (ETFs). It said pre-disclosure of portfolios can encourage copycat trading by individual investors and be abused for unfair trading.
On the 24th in the morning, at the Korea Financial Investment Association in Yeouido, Seoul, the Financial Supervisory Service (FSS) held a meeting with major ETF managers, liquidity provider (LP) securities firms, and executives of the Korea Financial Investment Association.
Seo Jae-wan, assistant deputy governor at the Financial Supervisory Service (FSS), said, "With market indicators such as stock prices and oil prices changing rapidly due to the recent Middle East situation, please exercise meticulous care for stable management."
The Financial Supervisory Service (FSS) judged that as ETFs grow in size, portfolio rebalancing often affects the prices of the underlying spot assets.
In the case of passive ETFs, during the process of replacing index constituents or adjusting weights before the market close, the prices of the underlying assets can surge or plunge. This is because rebalancing trades executed during the closing call auction can newly add specific stocks at higher prices than the previous day when liquidity in those stocks is insufficient. Due to product structure, leveraged ETFs also have the potential to amplify index volatility during adjustments.
The Financial Supervisory Service (FSS) also pointed to excessive marketing among some managers, such as at a webinar held by Samsung Active Asset Management ahead of the launch of the "KoAct KOSDAQ Active" ETF, where some holdings and weights were disclosed. The share prices of the stocks Samsung Active Asset Management revealed surged in after-hours trading, sparking controversy.
With intensifying industry competition raising concerns about exaggerated advertising for ETF strategies and profitability, the Financial Supervisory Service (FSS) noted that managers should deliver accurate information while ensuring the premium/discount between net asset value and trading price does not widen excessively.
Managers participating that day agreed on the need to strengthen internal controls and the risk management framework as ETFs gain influence. However, they said that in an ETF market centered on large firms, differentiated strategies by each company are needed to resolve this concentration, and cooperation from the authorities is necessary to achieve that.
An official at the Financial Supervisory Service (FSS) said, "We will communicate with the industry so that ETF growth leads to both increased investor participation and stronger manager capabilities," adding, "If issues arise related to investor protection, we will respond strictly in accordance with the law."