Financial authorities are preparing to implement new regulations targeting single-stock leverage products. To protect investors, they are working on legal amendments that would allow them to directly lower the current leverage ratio of 2:1 for these products.
According to the financial authorities on August 2, the Financial Services Commission (FSC) is collaborating with the Financial Supervisory Service (FSS) to establish a legal basis for market stabilization measures aimed at managing the volatility of single-stock leverage products.
This follows initial supplementary measures announced on July 16, which included raising the basic deposit requirement, and additional measures on July 30. The authorities are focusing on amending the Capital Markets Act to provide a basis for invoking 'emergency measures.'
To inform this approach, they have referenced a recent case from Hong Kong, where the Securities and Futures Commission (SFC) issued guidelines on July 24 allowing adjustments to the leverage ratios of listed leveraged and inverse products based on the asset management capabilities of firms.
If emergency measures are authorized, financial authorities would be able to lower the leverage ratios of single-stock products in urgent situations where investor protection is necessary. Current laws stipulate that matters related to beneficiary interests must go through a beneficiary meeting, which requires a majority of voting rights from attending beneficiaries and at least one-fourth of the total issued beneficiary certificates.
Without securing emergency measures, it would be challenging to arbitrarily adjust the ratios directly linked to the profits of single-stock leverage products. In a meeting of the Political Affairs Committee on July 29, FSC Chairman Lee Ok-kyung noted that lowering the current 2:1 ratio could help mitigate volatility, but he emphasized the need to consider how to address beneficiary meetings and investor interests during the legislative process.
Some analysts predict that if emergency measures are secured, trading restrictions or suspensions could also be possible. The Capital Markets Act was amended last April to allow for trading restrictions of up to five years for unfair trading and illegal short selling, raising questions about whether this could be applied to single-stock leverage products. However, there are concerns that singling out specific products for regulation could deviate from the original intent of broad regulatory powers.
Additionally, financial authorities are exploring the early implementation of investment limits and mandatory simulated trading. The investment limit would standardize the single-stock leverage investment cap to around 20% per account. While raising the basic deposit requirement may deter small investors, setting investment limits could help reduce losses for larger investors.
Simulated trading is a response to criticisms that existing single-stock leverage education is too theoretical. A financial authority official explained, "We aim to introduce practical training for single-stock leverage products, similar to how investors practice with derivatives and short selling before actual investments."
* This article has been translated by AI.
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