South Korea tightens Samsung and SK hynix leveraged ETF rules as Kospi plunges
The financial authorities agreed to implement a number of regulations, with one lawmaker accusing the products of creating “monthly rent refugees.”
The government moved swiftly on Wednesday to tighten regulations on single-stock leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK hynix after the benchmark Kospi plunged as far as the 5,600 range.
Amid growing criticism that leveraged ETFs have amplified stock market volatility, the recent move caps individual investors’ holdings at 20 percent of their total investment portfolio.
Deputy Prime Minister and Finance Minister Koo Yun-cheol, Bank of Korea Gov. Shin Hyun-song, Financial Services Commission (FSC) Chairman Lee Eog-weon and Financial Supervisory Service (FSS) Gov. Lee Chan-jin agreed on the measures during an emergency financial market monitoring meeting, known as the “F4 meeting,” held at 7 p.m.
The government also decided to introduce a system similar to the excessive order fee imposed in the futures market for leveraged ETF trading. In addition to the existing mandatory investor education program, leveraged ETF investors will also be required to complete trading simulations.
Authorities also plan to establish a legal basis allowing the government to take market stabilization measures in emergencies by adopting a variable leverage structure similar to that used in Hong Kong, under which asset managers can adjust the leverage rate between one and two times depending on market conditions.
Financial authorities previously announced a package of measures for leveraged ETFs on July 16, including raising the minimum cash deposit required to trade the products from 10 million won ($6,920) to 30 million won and increasing the minimum trading unit from one share to 20 shares.
The higher deposit requirement had been scheduled to take effect early next month, while the larger trading unit was set to be introduced in November. Following Wednesday’s meeting, however, the government decided to implement both measures simultaneously on Friday.
Lawmakers from both the ruling and opposition parties sharply criticized the Samsung Electronics and SK hynix single-stock leveraged ETFs during a plenary session of the National Assembly’s National Policy Committee on Wednesday.
“There are serious questions about whether the products were launched under external pressure rather than at the initiative of the FSC, and whether listing requirements, including investor protection measures, were adequately reviewed,” ruling Democratic Party Rep. Kim Yong-man said.
“The launch of the leveraged ETFs was a man-made disaster caused by the FSC and the FSS,” Rep. Park Dae-chul of the opposition People Power Party (PPP) said. “The government is turning people into ‘monthly rent refugees’ and ‘stock market beggars.'”
Responding to the criticism, the FSC and FSS chiefs expressed regret over the situation.
“I take seriously the responsibility for the increased market volatility caused by leveraged ETFs,” FSC Chairman Lee Eog-weon said.
FSS Gov. Lee Chan-jin echoed the sentiment, saying, “We will do our utmost to minimize volatility.”
Lawmakers also questioned the responsibility of Presidential Chief of Staff for Policy Kim Yong-beom, who led the push to introduce the leveraged ETFs.
“It took less than five months for the products to be launched after presidential chief of staff for policy Kim Yong-beom instructed officials to review the introduction of the products earlier this year,” PPP Rep. Park Sung-hoon said.
“The government has created a speculative gambling table where retail investors are losing their money.”
Speaking to reporters in São Paulo on Tuesday while accompanying President Lee Jae Myung on his state visit to South America, the policy chief rejected the criticism.
“People are acting as though every problem boils down to leveraged ETFs, but that is not the case,” he said. “Retail investors are trading very actively and there are many related derivatives. [Samsung Electronics and SK hynix] also account for a very large share of the market.”
But the explanation has done little to quell criticism.
“People are suffering heavy losses after two straight days of plunging stock prices, yet a senior government official is offering nothing but feeble excuses and sophistry. I find it outrageous,” PPP floor leader Jeong Jeom-sig wrote on Facebook on Wednesday.
“Someone must be held accountable and step down for turning the stock market into this mess.”
BY KIM DO-NYUN [kim.jiye@joongang.co.kr]
