South Korea FSC to ban new listings of single-stock leveraged ETFs from Aug 5

By: Heejin Kim, Sherin Sunny, and Cynthia Kim Source: Reuters

SEOUL, July 16 (Reuters) – South Korea announced on Thursday that it will temporarily ban new listings of exchange-traded funds (ETFs) linked to certain major technology firms, while raising the minimum deposit required for retail investors to trade such products, in an effort to curb market volatility.

Key Measures

• New Listings Halted: The Financial Services Commission (FSC) said it will suspend new listings until market conditions stabilize.
• Higher Minimum Deposit: The minimum cash balance required to trade single-stock leveraged ETFs will be raised from 10 million won ($6,730) to 30 million won ($20,300), effective August 5.

Background

The new measures mark a sharp policy reversal by South Korean regulators, following the recent approval of domestic single-stock leveraged ETFs linked to Samsung Electronics and SK Hynix in late May.

A surge in popularity of these leveraged ETFs—particularly those tied to the two chipmakers—has been blamed by politicians and investors for increasing market volatility. The products require frequent and large rebalancing trades on a daily basis.

How Leveraged ETFs Work

Leveraged ETFs use derivatives to replicate bets made with borrowed money, promising a multiple of a stock's daily returns. These products can generate significant trading activity that exceeds real investor flows, as purchases must be scaled up to mirror a leveraged position. However, they tend to underperform over time due to fees and trading costs, and expose investors to sharper losses if the underlying investments decline.

Investor Protection Measures

As part of its new rules, the government will require asset managers to retain qualified liquidity providers (LPs) and hold them accountable for any large pricing disparities.

"Effective this August, broker-dealers and asset management companies (AMCs) will be mandated to retain high-quality LPs to assume formal accountability for managing these pricing disparities," said Byun Je-ho, Director General for the Capital Markets Team at the FSC.

"Why are we holding asset managers accountable? Because they are the ones that can hire quality LPs to better manage price disparities."

Byun added that investors will face higher minimum deposit requirements for both domestic- and foreign-listed single-stock leveraged products. Investors must maintain a cash balance of at least 30 million won as a basic margin deposit each time they trade new single-stock leveraged ETFs.

Industry Reaction

Inki Cho, a senior financial market strategist at Exness, an online trading platform, described the FSC intervention as "overdue."

"This is a correction of a known policy error," he said. "Likely measures include tighter leverage caps, stricter retail suitability requirements, or volatility-linked circuit breakers on these specific products."

"The announcement itself is a near-term risk though—aggressive measures could trigger a rush to exit ahead of implementation, amplifying the very volatility the FSC is trying to fix."

Over the longer term, however, Cho said the move would be a net positive for market credibility.

Market Impact

The KOSPI plunged more than 6% on Thursday, heading into a bear market, though it remains the world's best-performing major equity market this year.

In June, the head of South Korea's market watchdog issued a rare mea culpa, acknowledging that the regulator had been too hasty in approving such products.

The ETFs helped drive retail investors' borrowed investment into equities to a record 60 trillion won ($40.39 billion) as of the end of May.

($1 = 1,485.5000 won)

Reporting by Heejin Kim and Sherin Sunny; Additional reporting by Jihoon Lee and Sameer Manekar; Editing by Muralikumar Anantharaman, Sam Holmes, and Thomas Derpinghaus