In the recent past, the Korean regulatory authorities have continued to tighten the ETF trading threshold for single-equity leverage, in an attempt to reduce the speculative heat that once pushed up market volatility. With the new regulations in place, the trade in related products around Samsung electronics and SK Hercules became significantly cooled and funds began to flow out.
In August, only 4% of the higher turnover was left.
According to Bloomberg, on August 29, a single-share leverage linked to Samsung electronics and SK Hercules, ETF, combined transactions dropped to 4 per cent of the June peak in August. As at 27 August, the size of the related product asset management had dropped from a high of $11.4 billion at the end of June to $5 billion, with a net outflow of about $1 billion in August alone.
This product was launched in May this year and was originally conceived as a tool to attract the diaspora back to the Korean stock market. At the time of the most dynamic transactions, however, the combination of the relevant positive shares and leverage ETFs once accounted for more than 80 per cent of the total turnover of the South Korean stock market, with which market volatility increased.
Five days of simulator trading into a new threshold.
The Korean regulatory authorities have been raising the threshold of participation since July. Early measures included requiring investors to hold at least 30 million won of cash to trade in such products.
The latest provisions entered into force on 19 August. Investors are required to download a special program at the end of the PC to complete at least one hour of simulator transactions per day for five consecutive days before they can qualify for the transaction. The system provides 100 million won of virtual funds to demonstrate the risks of leverage products in shock situations.
However, the process is considered too cumbersome by a number of dispersed households. As the process only supports Windows PCs and there is no mobile version, some investors indicate that installation restrictions and time requirements are sufficient to allow them to give up their participation.
Fluctuations but weak liquidity
Following a tightening of regulation, the South Korean composite stock index-related volatility indicator fell from 97 at the end of June to about 50, down to four months of low, indicating that short-term market volatility has eased.
But the rapid contraction of the deal also poses new problems. For investors still holding related ETFs, a decline in liquidity means that exit is more difficult and the cost of selling may increase. According to Pembo think tank analyst Rebecca Sin, the regulatory attitude in Korea has shifted from support to restraint, and the pressure on financial outflows may persist in the short term.