As the incidence of abnormal ETF premiums surges, the Korea Exchange has intensified its oversight of liquidity providers (LPs) and asset management firms. The exchange has warned that failure to properly manage premiums could lead to restrictions on new ETF listings and LP operations, and it has initiated efforts to improve related regulations.
According to the financial investment industry on June 25, the Korea Exchange sent a notice to ETF LPs and asset management firms on June 18, reiterating the importance of premium management obligations. The exchange stated that if these obligations are not fulfilled, it would actively consider imposing restrictions on new ETF listings for asset management firms and on LP operations for securities firms.
This notice is seen as a response to the recent surge in cases of excessive ETF premiums. ETF premiums refer to the difference between the market price of an ETF and its net asset value (NAV). When premiums become excessively large, investors may end up buying at prices higher than the actual asset value or selling at lower prices, leading to potential losses.
The exchange clarified the obligation for LPs to submit quotes. According to Article 20-4, Paragraph 1 of the Securities Market Business Regulations, LPs must submit liquidity supply quotes if the bid-ask spread exceeds a certain level. However, during the single-price trading period when simultaneous bidding is applied, the obligation to submit quotes for maintaining the spread is waived.
Some interpreted this as an exemption from the obligation to present LP quotes during simultaneous bidding periods, but the exchange clarified that this is not the case. According to Article 20-4, Paragraph 2 of the regulations, LPs are required to submit liquidity supply quotes to ensure that premiums do not exceed a certain level during the price determination process.
For ETFs based on domestic assets, LPs must manage premiums within 3%, while those for overseas asset-based ETFs must be kept within 6%.
The exchange's mention of potential listing restrictions indicates its assessment that the premium issue has reached a serious level. According to the exchange's listing disclosure system (KIND), there were a total of 1,047 disclosures of excessive ETF premiums from June 1 to June 24, a more than fivefold increase compared to 202 cases during the same period last year. This figure is nearly double the 559 cases reported in May.
A notable example occurred on June 8, when the ACE SK Hynix Single Stock Leverage ETF experienced a premium spike of 90.18% due to a gap in quotes during the price determination process, raising concerns about potential investor losses.
The exchange believes that the possibility of similar issues recurring cannot be ruled out and is currently soliciting industry opinions on the overall LP obligations and sanction system. Under current regulations, violations of premium management obligations only affect LP evaluations, resulting in low enforcement effectiveness.
The exchange plans to conclude its industry opinion gathering this week and will review whether to amend relevant regulations. Any necessary regulatory changes will need to go through procedures with the Financial Services Commission and the Korea Securities and Futures Commission, meaning actual improvements may take some time.
A representative from the financial investment industry stated, "Recent incidents could lead to a loss of investor trust rather than being seen as mere mishaps, which suggests that the authorities' trend of strengthening management will continue for the time being. I understand that the exchange is also considering increasing the severity of sanctions or enhancing its management system."
* This article has been translated by AI.
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