Korea's dispute over a single stock 2-leveraging ETF continues to grow. Members of Parliament of the National Forces Party, former presidential candidate An Cheol-Su, have publicly called for stronger regulatory measures to track Samsung electronics and the related products of SK Hercules, and have even promoted de-listing. In his view, such products were increasing the volatility of the Korean stock market.

Parliamentarians named two core weight shares

An Cheol-soo on the social platform says Samstar Electronics and SK Hercules Leverage ETF have failed in policy. Together, the two companies account for approximately 60 per cent of the total market value of KOSPI and continue to leverage over high-weight shares, further exacerbating index fluctuations.

He also targeted the Korean financial regulatory authorities and demanded that those responsible be held accountable. An Cheol-su stated that if such products continued to expand, the predictability of the Korean stock market would decline further.

Quick gold when the product is on the market.

Korea launched its first home-grown single stock at the end of May, 2 times-leveraged ETF, with a focus on Tristar Electronics and SK Hercules. The regulator then wanted to leave behind the high-risk demand for transactions that would otherwise flow to overseas markets.

Once the product is on the market, the transaction is expanded rapidly, with a significantly higher activity than normal ETF. However, with the recent shocks in the Korean stock market, such products have also become the focus of controversy. The central concern of the market is that its daily repositioning mechanism may intensify and fall in volatility.

Such products are usually leveraged through synthetic reproduction. In accordance with the rules, the agencies concerned are required to mechanize and recommence before closing: buy up when stock prices rise and sell when stock prices fall. In case of sharp fluctuations, this operation may further push up the market band.

Risk exposure to recent fluctuations

On 2 July, when the Korean stock market opened in only 10 minutes, KOSPI fell by more than 5 per cent and triggered a melting mechanism. On the same day, two times as many SK Hercules as ETF listed in Hong Kong fell by 20 per cent and once by 30 per cent in the Korean mainland KODEX SK Hynix 2 x Leveraged ETF.

Korea Exchange data show that in a month as of 2 July, SK Hercules stock prices had dropped by only about 7 per cent, but most of the associated leverage ETFs had fallen by almost 30 per cent. An Cheol-soo stated that tracking Samsung electronics and SK Hercules14 only listed leverage products recorded total negative gains during the same period, with a maximum drop of 35.9 per cent.

In addition, An Cheol-soo stated that the Korean stock market had triggered the “front-car mechanism” 31 times this year, i.e., five minutes of suspension of procedural transactions due to sharp fluctuations, and five times of smelting. In his view, the daily adjustment of leverage ETF and the suspension of profits and losses from investor collections had contributed to the market shock.

The Central Bank of Korea and the Regulatory Level are turning to caution.

As reported by the Korean Federation on 5 July, the Central Bank of Korea, in its written responses to the questions of parliamentarians, stated that Samsung Electronics and SK Hercules had a high share of the market value and turnover of the Korean stock market, and that if a single stock leverage ETF continues to expand, it could further increase market concentration and increase volatility.

The Central Bank of Korea also mentioned that such products can easily enhance the flow of unilateral funds once business performance or market expectations change. If the market reverses, the bulk losses may expand, and ETF foreclosure and rebalancing may further shock the relevant stock prices.

At the same time, the Korea Financial Supervisory Authority has begun to reassess the relevant products. The regulatory attitude that had previously authorized the listing of products had become conservative, and the Director of the Financial Supervisory Authority, Li Fook-hyun, had publicly expressed regret.

Currently, the Korean Congress has initiated a review of the ETF for single-stock leverage, with discussions in the direction of further tightening of regulation and even promoting the de-marketing of related products.