Kim Yong-beom, the presidential office policy chief, on the 19th said it is "hard to imagine delisting" single-stock leveraged exchange-traded funds (ETFs), cited as a factor behind heightened volatility in the Korean stock market. Some argue they should be delisted, but in a situation where the market has already grown huge, a method that locks in losses cannot be a solution, he said.
Kim appeared on KBS Sunday Diagnosis that morning and said, "Investors are already investing, and the product size has formed at over 1 trillion won," adding, "It is hard to imagine delisting." He continued, "If we were to delist, that in itself would deliver an enormous shock to the market," and asked, "Wouldn't we have to digest all that selling?"
The controversial single-stock leveraged ETFs are high-risk products designed to track twice the daily price swings of Samsung Electronics and SK hynix. They expand investor choices and can amplify returns when share prices rise. But when prices fall, losses grow by as much, making them in effect strongly speculative though legal. By product nature, transaction concentrates in specific large-cap stocks, increasing spot prices and overall index volatility. In Korea, related products were launched on May 27.
◇With a 30 million won deposit, mandatory 3 hours of education
The government, after a macroeconomic and financial issues meeting (F4 meeting), decided to: ▲ from next month, raise the required deposit for trading single-stock leveraged ETFs to 30 million won from 10 million won; and ▲ from Nov., increase the minimum purchase size per transaction to 20 shares. The designation process for investment caution items will also be reduced from the current three steps to two. In addition, the mandatory education time required to invest in these products will increase from two hours to three.
This is a measure ordered by President Lee Jae-myung. On the 15th, during a government ministry briefing at Cheong Wa Dae, the president said to Korea Exchange (KRX) Chairman Jeong Eun-bo, "It's noisy here because of ETFs too, right?" and "Prepare supplementary measures swiftly and properly." He also said, "Normalizing and advancing the capital market is an important task, so take good care of it."
Regarding these measures, Kim said, "Once implemented, a substantial portion of the problems and side effects that have been pointed out will be resolved," adding, "The authorities conducted extensive discussions and took steps that substantially accepted the issues raised in the market."
He also said the task is to minimize the "gap ratio," the difference between an ETF product's net asset value (NAV) and its market trading price, adding, "We can further discuss ways to rationalize the selling burden to match the gap ratio." In this regard, the government will narrow the brokerage firms' gap management obligation standard from the current 3% to 2%, and it will consider restricting new ETF listings for ETF managers that violate the appropriate gap ratio.
Kim said, "Leveraged ETF products have an aspect where their impact doubles in a downturn," adding, "The authorities, asset managers, and securities firms will likely need to further discuss how to minimize market shocks." He then noted the characteristic of heightened volatility in leveraged ETFs right before the market close, saying, "We need to consider various ways to minimize the shock this product delivers to the market at specific times."