As early as May 22, single-stock leveraged exchange-traded funds (ETFs) and exchange-traded notes (ETNs) are expected to be listed. However, the financial authorities, considering the high investment risk, decided to strengthen investor protection measures in tandem.
The Financial Services Commission said on the 21st that a revision to the Enforcement Decree of the Financial Investment Services and Capital Markets Act, aimed at eliminating asymmetric regulations between domestically and overseas listed ETFs, was approved at a Cabinet meeting. The revision is scheduled to be promulgated and take effect on Apr. 28.
Until now, the launch of single-stock ETFs and ETNs had been restricted in Korea due to regulations such as diversification requirements. In contrast, in overseas markets such as the United States and Hong Kong, a variety of single-stock-based ETFs are listed, prompting criticism that domestic investors' choices are limited.
Under the revision, single-stock leveraged ETFs using leading domestic stocks as the underlying asset will be permitted. The investment limit for the same stock will be expanded from the current 30% to 100%, and the rule requiring a minimum composition of 10 or more stocks will not apply.
The underlying assets are limited to two stocks: Samsung Electronics and SK hynix. The financial authorities, considering domestic market volatility, the need for investor protection, and trading stability, limited eligibility to stocks with a market cap share of 10% or more, a trading volume share of 5% or more, and a derivatives trading volume share of 1% or more.
Product types will include single-stock ±2x leveraged ETFs and single-stock covered call ETFs. A covered call is a product that buys the underlying asset in the cash market and sells related call options, distributing the option premium to investors as dividends.
Along with this, products in the derivatives market will also be expanded. Weekly options, previously allowed only on stock indexes, will be extended to individual stocks and ETFs, with individual stock weekly options slated for late June and ETF weekly options to be introduced in the second half.
However, the financial authorities will also strengthen investor protection, given the risks of leveraged investing. First, investors who wish to invest in single-stock leveraged ETFs and ETNs must complete one hour of advanced pre-education. The course will be available starting Apr. 28.
In addition, the basic deposit requirement of 10 million won will apply to investors in overseas-listed single-stock ETFs and ETNs. This will apply to new investors and will not be applied retroactively to existing investors.
In addition, product names will clearly indicate characteristics such as "single stock" and "leveraged/inverse," and guidance on key risk factors and the possibility of losses will be strengthened through the review of securities registration statements.
The financial authorities said, "ETFs based on single stocks are not diversified investment products based on an index, but rather concentrate on a single company, which can be directly exposed to risks from negative developments at the individual company and industry conditions, so particular caution is required."