The Korea Exchange (KRX) has moved to stop the practice of ETF managers effectively changing a product's nature by arbitrarily altering keywords used in index calculation. It clarified that changing keywords without prior consultation with the exchange could be grounds for delisting, strengthening oversight of ETF operations.
According to the financial investment industry on the 21st, the Korea Exchange (KRX) on the 16th delivered "guidelines on changing ETF keywords" to major asset managers. The key point is that for ETFs that select constituents using specific keywords within the index methodology, any change to the keywords must go through prior consultation with the exchange.
In the guidelines, the exchange said, "The keyword methodology tends to rely on qualitative judgment rather than quantitative criteria," and noted, "We have identified cases of indices being changed excessively fluidly."
In particular, the exchange specified that "changing the keywords used for constituent selection may constitute a change in the index calculation criteria and, under current rules, may meet the conditions for delisting." Article 116, Paragraph 1, Subparagraph 2(b) of the current KOSPI Market listing regulations provides that if an ETF's underlying index calculation criteria are changed, the exchange may delist the ETF.
However, the exchange explained that exceptions may apply if changes to the calculation criteria are unavoidable or if, even after the change, the market in which the underlying asset is traded and the primary target investment asset remain the same and the index's original purpose and continuity are deemed to be maintained. Even in such cases, the manager must go through prior consultation with the exchange and follow formal change procedures.
The move is seen as driven by growing need to protect investors after a series of recent cases in which ETF managers changed index calculation criteria to adjust constituents. Earlier, we reported that the "TIGER Semiconductor TOP10" ETF by Mirae Asset Global Investments changed its index calculation criteria ahead of a regular rebalancing to replace constituents, sparking industry controversy. (Related article☞[Exclusive] "No. 1" Mirae Asset TIGER semiconductor ETF makes unusual constituent changes ahead of regular revamp, fueling industry controversy)
The exchange also recommended that, from the index design stage, managers clearly define the importance and application order for each keyword. The intent is to establish criteria in advance to objectively judge whether the index's identity and continuity are maintained even if keywords are changed later.
The exchange advised managers, "Set the importance and application order for each keyword in advance, and request an index change review only for changes between keywords with similar importance."