The Korean financial industry is discussing tightening the ETF investment threshold, focusing on tracking Samsung electronics and SK Hercules' chip stock products. As these types of ETFs retreated significantly after they were listed, the industry began to promote stricter investor protection measures and tried to reduce the market impact of daily rebalancing transactions.

After 10 products were listed, they retreated.

According to Bloomberg, citing information from the Korea Financial Investment Association, the heads of 10 large asset management companies in Korea have been discussing risk control for a leveraged ETF. There was general agreement on the need to increase the minimum deposit requirement for such products from the current 10 million won.

The immediate background to this round of discussions was the fact that the ETF, which tracks the leverage of Samsung electrons and SK Hercules, has fallen significantly since it came out on the market in late May, and that some of the prices of the products are close to being cut to the waist, and that the losses of investors are increasing rapidly.

Of this, the largest SAMSUNG KODEX SK Hynix Single StockLeverage management asset was approximately $3.4 billion. The product has fallen by about 45 per cent since its launch, more than 60 per cent above the June height.

Rebalancing the scale of the deal raises concerns.

ETF is usually required to maintain the established leverage multiple through daily rebalancing. This means that the issuer may continue to buy in when the equity price rises, or need to sell when the stock price falls, and can easily magnify the price change in a volatile pattern.

The Korea Financial Investment Association, citing data from the Korea Capital Markets Institute, stated that, after the launch of the leverage ETF, the daily rebalancing of the corresponding stock exchange was estimated to be between 70 billion and 2.1 trillion won.

Currently, most of these transactions are concentrated on pre-disbursing, which tends to have a concentrated impact on tailings prices and increases market concerns about liquidity and short-term fluctuations.

Industry discussions to adjust trading arrangements

In addition to raising the minimum deposit requirements, KRAs have discussed the decentralization of rebalancing operations to different time periods within the trading day to mitigate the impact of centralized transactions on secondary markets.

Participating institutions also mentioned the need to further enhance the stabilizing role of liquidity providers in extreme situations and to mitigate liquidity pressures in the face of rapid market fluctuations.

The above measures are still at the stage of discussion and the concrete implementation programme has not yet been finalized. However, from the industry’s point of view, the Korean market’s interest in a leveraged ETF risk has risen significantly, with subsequent regulations and product sales rules likely to tighten.