The Republic of Korea will convene a F4 meeting on Thursday, with the participation of the Ministry of Finance and Economy, the Finance Commission and the Korea Banking and Financial Supervisory Authority, to discuss the impact of single-equity leverage ETF on stock market volatility. For the first time, this topic has entered the highest economic coordination platform in Korea, showing that it is considered a market stabilization issue at the regulatory level.
The single leverage ETF went online in South Korea on May 27 and allowed investors to make two-fold bets in the direction of Tristar Electronics and SK Hercules. Such products require daily repositioning to track the single-day rise and fall of the target, which can be magnified by a single stock and index fluctuations in the event of sharp swings.
KOSPI has significantly increased volatility
On Monday this week, KOSPI fell over 8% a day and triggered the seventh melting in the year, and the market focus was concentrated on a single leverage ETF. The Korean securities industry and regulatory agencies have planned to communicate before government meetings to provide industry advice to regulators.
According to NH Investment Securities Statistics, out of 96 trading days before single-share leverage ETF went online, KOSPI fell by more than 3 per cent a day in the proportion of 27 per cent; of 33 trading days after going online, the proportion rose to 52 per cent.
Korea’s exchange data show that, as at 13 July, the stock market had triggered 35 “marginal” mechanisms this year, well above the 3 in the course of last year’s full year, and over the 26 recorded during the 2008 financial crisis. The smelting mechanism for the total suspension of transactions has been triggered seven times this year.
Regulatory research on three types of measures
There are three main types of response in the current discussion: raising the level of security requirements, limiting daily price fluctuations and adjusting the leverage ceiling. The Finance Committee has brought together experts from vouchers and management companies to discuss additional measures, and pre-investment education is also considered.
However, regulators also recognize that these approaches are more like short-term patches and do not necessarily directly address the causes of increased volatility. Follow-up may continue even if a preliminary decision is reached on Thursday.
Regulatory statements continue to upgrade
The President of the Korea Financial Supervisory Authority, Li Zhang Town, stated in a recent closed meeting with the management company that the issues involved were structural and difficult to solve once in a while and required continuous monitoring and revision. He had also publicly stated that the introduction of such products was “regrets are not used to stop it”, a statement that was not common in the Korean regulatory context.
Koo Yun-cheol, Deputy Prime Minister and Minister of Finance and Economy of Korea, also indicated last week that the Government was in the process of consulting on remedial programmes and ways to reduce related problems. Kim Yong-beom, Director of Policy, Bluewood, stated that F4 was in the process of making an in-depth assessment of whether single-equity leverage ETFs had increased market volatility and would decide if necessary.
In terms of time, such products are on the market for only one and a half months, and regulatory pressure has rapidly risen from the Financial Supervisory Authority to the highest levels of economic decision-making. The market now expects that the Republic of Korea may follow by tightening the leverage multiplier, raising the investor ' s access threshold or introducing more structural restrictions.