Financial authorities are pushing to introduce an "emergency action authority" that would allow them to quickly lower the leverage multiple of single-stock leveraged products in emergencies, which have been identified as a main cause of sharp market swings. They are also reviewing additional regulatory measures, including setting leverage investment limits and further raising the basic margin deposit.
According to Yonhap News on the 2nd, the Financial Services Commission will draw up an amendment to the Financial Investment Services and Capital Markets Act together with the Financial Supervisory Service to establish a legal basis for market-stabilization steps in urgent situations.
The key is to allow financial authorities to temporarily adjust the multiple of single-stock leveraged ETFs. Currently, domestic single-stock leveraged products are designed to track a 2x return. Through the emergency action authority, if it is deemed necessary to protect investors, the multiple would be lowered to 1.5x or 1x.
Lee Eog-weon, chair of the Financial Services Commission, said at a full meeting of the National Policy Committee on the 29th, "If we lower the multiple (currently 2x), it seems it would be effective in terms of reducing volatility," while adding, "We will review in the legislative process how to consider the beneficiaries' general meeting and the investor side."
The authorities referred to Hong Kong's example of variable leverage multiples. The Securities and Futures Commission announced on the 24th that, based on preset criteria and disclosures according to an asset manager's operational capacity, it would allow adjustments to the multiples of listed leveraged and inverse products.
Under the current Financial Investment Services and Capital Markets Act, changing leverage multiples is not easy. Because the multiple is a core matter directly tied to investors' rates of return, it is highly likely to require a resolution at a beneficiaries' general meeting. Such meetings require approval by a majority of voting rights of attending beneficiaries and at least one-quarter of the total number of beneficiary units outstanding, making it hard to respond swiftly to fast-changing market conditions, critics have noted.
Accordingly, the financial authorities are considering a plan to allow temporary adjustments to the multiple for a set period in urgent market conditions without going through a beneficiaries' general meeting. During the action period, an upper limit would apply, and the multiple could only be lowered to at or below the existing level, a leading option under discussion.
At the same time, the authorities are considering setting leverage investment limits and mandating paper trading. The crux is to allow only about 20% of an investor's total investment limit to be put into leverage. If the increase in the basic margin deposit that took effect on the 31st was intended with small investors' entry in mind, the investment limit targets investors with relatively large transaction amounts.
There is also a possibility that the basic margin deposit will be raised further. On the 31st, the financial authorities raised the basic deposit from 10 million won to 30 million won, but they say further increases are possible depending on circumstances.