The financial authorities unveiled tough measures to cool an overheated leveraged exchange-traded fund (ETF) market by tripling the basic margin deposit to 30 million won. The aim is to block reckless entry by individual investors and prevent large losses.
On the 20th, opinions among market experts in the securities industry were split over the move. Some said it would work as first aid to cool the overheated mood, while many others noted it would fall short of curbing fundamental volatility if it only raises entry barriers.
Earlier, the Financial Services Commission announced measures to shore up single-stock leveraged products after a market review meeting on the 16th presided over by Deputy Prime Minister and Minister Koo Yun-cheol.
Accordingly, the basic margin deposit required to invest in single-stock leveraged ETFs for Samsung Electronics and SK hynix will rise to 30 million won, and investments will be allowed only in cash without substitute securities. The trading lot size will also increase from 1 share to 20 shares.
Lee June-seo, president of the Korean Academic Society of Securities, said it was "a meaningful measure to protect investors in line with the nature of a high-risk product." Lee said, "This product was originally designed as a high-risk instrument for hedging (risk dispersion) and arbitrage by institutions or foreign investors rather than individuals," adding, "It is a measure with a clear protective effect in that it blocks in advance the entry of reckless investors who could flow in going forward."
Lee Jin-woo, head of research at Meritz Securities, also said, "The direction of raising the margin requirement and creating a hurdle for single-stock leveraged products is valid," analyzing, "It will have some effect as a measure to disperse transactions so they do not become excessively overheated and to reduce tracking error, thereby easing shocks to the market."
Conversely, some said it would draw criticism as "kicking away the ladder" by depriving small investors of opportunities to generate profit. Lee pointed out, "Some individual investors who sought high risk and high return with small amounts may say they have been deprived of opportunities to generate profit."
Criticism also continued that the supplementary plan is just a "stopgap measure" that merely delays the shock. With the domestic stock market now facing extreme volatility due to structural supply-demand distortions, simply raising entry barriers is unlikely to provide a fundamental solution. The market expects follow-up measures such as investor education or stricter qualification requirements for transactions to be needed.
An asset management industry official who requested anonymity added, "From the start, allowing leveraged ETFs only for the two stocks, Samsung Electronics and SK hynix, caused funds to concentrate excessively," and "This step may ultimately amount to a buffer that only slightly reduces the intensity of the market shock."
Foreign media also warned about Korea's stock market turning overly speculative. Bloomberg said on the 19th (local time) that "President Lee Jae-myung's dream of reviving the stock market is facing a backlash due to leveraged ETFs," and reported that "the most talked-about innovation in Korea's stock market is turning into a headache for Lee."
Bloomberg said Lee fueled optimism with a pledge to boost shareholder value and make Korea an attractive investment destination, helping the Korea Composite Stock Price Index (KOSPI) top 5,000 for the first time this year.
However, Bloomberg noted that the market now faces criticism that it has become excessively speculative—resembling a gambling table—due to single-stock leveraged ETFs for Samsung Electronics and SK hynix, listed in May, which track double the daily move.
The outlet added, however, that it is unclear whether Lee directly approved the introduction of leveraged ETFs, and much of the criticism is directed at the financial authorities and the administration.