SEOUL, July 28 (AJP) —South Korea is considering imposing an individual investment cap on single-stock leveraged exchange-traded funds (ETFs) should speculative trading persist despite recent market stabilization measures, the country's financial chief said Tuesday.
Financial Services Commission Chairman Lee Eog-weon said authorities will first assess whether tighter rules taking effect Friday, including a higher minimum cash deposit requirement, are sufficient to cool speculative demand. If investor appetite remains elevated, additional measures are being prepared, he said.
One proposal under review would limit investment in single-stock leveraged ETFs to no more than 20 percent of an individual's total financial investment portfolio.
Authorities are also considering requiring investors to complete simulated trading, undergo periodic training and demonstrate a minimum level of investment experience before being allowed to trade the products.
Lee made the remarks during a meeting with major securities firms serving as liquidity providers (LPs), including Korea Investment & Securities, NH Investment & Securities and Kiwoom Securities, as well as leading asset managers such as Samsung Asset Management, Mirae Asset Global Investments, KB Asset Management and Shinhan Asset Management.
He also urged asset managers to spread ETF rebalancing trades more evenly throughout the trading day rather than concentrating orders near the market close, saying end-of-day rebalancing has amplified market volatility.
"While rebalancing earlier in the trading day could increase tracking error or return uncertainty, it could also reduce closing-price volatility, curb front-running and lower operational risks," Lee said.
Turning to liquidity providers, Lee noted that some single-stock leveraged ETFs have attracted more than 20 LPs, fueling trading among LPs themselves and increasing arbitrage activity.
Rather than introducing prescriptive regulations, authorities expect liquidity providers to reduce unnecessary trading by adjusting the size, frequency and timing of their quotes within existing pricing parameters, he said.
The meeting followed the FSC's July 16 package of market stabilization measures aimed at reducing volatility in single-stock leveraged ETFs. The package suspended new product launches and advertising, moved forward the introduction of a 30 million won ($21,000) minimum cash deposit requirement to July 31, strengthened mandatory investor education with tougher assessments and an additional one-hour training session, and tightened rules governing ETF price deviations, which are scheduled to take effect on Aug. 19.
Lee said the measures were introduced after demand for the products grew far faster than expected as volatility in semiconductor stocks intensified following the launch of single-stock leveraged ETFs, fueling speculative trading and sharp swings in the broader market.
Copyright ⓒ Aju Press All rights reserved.
