To prevent the expansion of premiums and discounts in single-stock leveraged exchange-traded funds (ETFs), financial authorities are preparing measures to tighten oversight of liquidity providers (LPs).
According to financial authorities on the 5th, the Financial Services Commission, the Financial Supervisory Service, and the Korea Exchange (KRX) are reviewing system improvements to stabilize the premium/discount of single-stock leveraged ETFs.
Financial authorities are said to believe that the widening premium/discount in single-stock leveraged ETFs stems from operational issues, such as market orders clustering during gaps in LP quotes. To prevent a recurrence, officials are reportedly considering strengthening LP evaluation standards or imposing disadvantages in ETF reviews on asset managers that experience premium/discount incidents.
Single-stock leveraged ETFs recently sparked controversy as the gap widened between market prices and net asset value (NAV). A representative case came in early last month with Korea Investment Management's "ACE SK hynix Single-Stock Leverage."
At that time, the ETF closed about 50% higher, while the underlying asset, SK hynix, fell 8%. Given the product structure, there should have been a price drop of about 16%, twice the underlying asset's 8% decline, but in reality the price instead surged.
The widening premium/discount was attributed to prices spiking after market-on-close buy orders were executed once LP quote submission obligations lapsed just before the close.
According to the Korea Exchange (KRX), there were a total of 57 disclosures last month of single-stock leveraged ETFs exceeding premium/discount thresholds. The premium/discount is an indicator showing the difference between an ETF's actual value, or net asset value (NAV), and market prices. When the premium/discount is high, investors are more likely to buy an ETF at a price above its actual value or sell at a price below it.