Investors looking to trade domestic or overseas single-stock leveraged exchange-traded funds (ETFs) and exchange-traded notes (ETNs) in South Korea will need to hold at least 30 million won (approximately $20,296) in cash in their accounts starting next month. The Financial Services Commission (FSC) unveiled a set of supplementary measures on Wednesday, following discussions at a market monitoring meeting chaired by the deputy prime minister for economic affairs, raising the base deposit requirement from the current 10 million won (approximately $6,765) to 30 million won. The minimum trading unit will also increase from 1 share to 20 shares, and new listings of related products will be halted entirely until the market stabilizes.
The crackdown comes after single-stock leveraged products, launched on May 27, saw their combined market capitalization balloon to roughly 12 trillion won (approximately $8.1 billion) in less than two months, drawing criticism that excessive concentration of funds in specific stocks like Samsung Electronics and SK Hynix was amplifying stock market volatility. President Lee Jae-myung had directly ordered Korea Exchange Chairman Chung Eun-bo and Financial Supervisory Service Governor Lee Chan-jin during a briefing at the presidential office on Tuesday to “swiftly prepare supplementary measures,” and financial authorities produced a concrete regulatory package within a day.
The 30 million won base deposit requirement will take effect around August 5. Previously, investors could count up to 70% of the market value of securities such as stocks, ETFs, and bonds held in their accounts toward the deposit, but going forward, only cash will be recognized. The measure excluding securities as collateral from deposit calculations is scheduled for implementation around August 19. Investors must have 30 million won in cash in their accounts at the time of purchase; for example, if an investor buys 20 million won worth of products from a 30 million won cash balance, they must replenish the account back to 30 million won in cash before making additional purchases. However, the deposit requirement does not apply when selling already-held positions. Existing investors are not forced to liquidate their holdings.
Furthermore, the common practice of brokerages lowering the base deposit threshold for experienced investors will be completely banned. Currently, brokerages can typically ease deposit requirements after three months of trading activity by considering factors such as investment experience, but this will not be permitted for single-stock leveraged products. Brokerages may, however, impose stricter standards at their own discretion.
The minimum trading unit will expand from the current 1 share to 20 shares starting in November. This measure aims to address the structure where single-stock leveraged ETF prices, typically around 10,000 to 20,000 won (approximately $6.77 to approximately $13.53) per share—lower than the underlying stocks—make small-sum investing too easy. With the 20-share minimum, the entry investment amount rises to roughly 340,000 won (approximately $230) for Samsung Electronics and about 400,000 won (approximately $271) for SK Hynix, designed to make investors think twice before buying. For existing investors holding fewer than 20 odd-lot shares who wish to sell, a separate process will be established whereby brokerages will directly purchase those odd lots at market-equivalent prices and then bundle them into 20-share blocks for sale on the market.
Measures to curb overheated market competition will also take effect immediately. Relevant agencies will temporarily suspend new listings of all single-stock-related products—including not only leveraged but also inverse and covered-call products—until the market stabilizes. For products already trading, advertising and promotional marketing by brokerages and asset management firms will be prohibited.
Tracking error management—the gap between ETF and ETN market prices and their actual net asset value—will also be significantly tightened. The tracking error management obligation standard for domestic liquidity providers (LPs), which applies to all ETFs and ETNs, will be lowered from the current 3% to 2%. Grounds will also be established allowing the Korea Exchange to restrict a brokerage’s LP duties for new products if the brokerage violates tracking error management obligations due to intentional or gross negligence. The regulator is also considering restricting new ETF listings for asset managers whose operating ETFs breach the exchange’s appropriate tracking error thresholds. The procedure for designating an ETF as an investment-caution security when it repeatedly exceeds double the management obligation standard will be shortened from the current three stages to two. Once designated as an investment-caution security, the ETF will be switched to a single-price trading method.
Investor pre-education requirements will also be strengthened. Currently, new investors in domestic and overseas single-stock leveraged products must complete a total of two hours of training—one hour of basic education on general leveraged products and one hour of advanced education on single-stock products. Going forward, an additional hour of case-study-based advanced education reflecting recent market conditions and loss examples will be added, bringing total required education time to three hours. Mid-term assessment questions will also be expanded, and investors scoring below 60 points will be required to retake the relevant educational content. The Korea Financial Investment Association will introduce chapter-specific mid-term assessments starting in late July, and investors with low comprehension could see their required study time extend to up to four hours.
Risk notifications through brokerage mobile trading systems (MTS) will also be expanded. Investors who incur a certain level of losses or hold products beyond a specified period will receive automatic, periodic push notifications or alert messages detailing loss rates and the risks of medium-to-long-term holding.
Byun Je-ho, director of the FSC’s Capital Markets Bureau, said at a briefing on Wednesday, “Because unexpectedly rapid overheating and concentration have occurred, we are unavoidably raising the deposit barrier to maintain market order and restructure the market around investors with the capacity to absorb losses.” He added, “This is not intended to block trading unconditionally.” Byun further stated, “Through the 30 million won base deposit, the elimination of securities-as-collateral recognition, and the increase of the minimum trading unit to 20 shares, we estimate that the current market capitalization of roughly 12 trillion won will shrink to the 4 trillion to 5 trillion won (approximately $2.7 billion to approximately $3.4 billion) level seen at the initial launch stage.”
Criticism has emerged that the measures single out retail investors. Looking at trading volumes since the listing of single-stock leveraged ETFs, retail investors account for 40%, while foreign and institutional investors account for 60%. Foreign and institutional investors are exempt from mandatory leveraged-product education, and their larger basic trading units render deposit requirements meaningless. Critics argue the supplementary measures effectively target only retail investors.
Responding to this, Director Byun said, “In the case of cross-border trading where investors open accounts directly with overseas local brokerages, authorities cannot track and block individual movements one by one. However, domestic marketing aimed at the general public or the provision of convenience through domestic brokerages will be completely blocked institutionally, so the vast majority of circumvention attempts can be prevented.”
Byun drew a line on the possibility of delisting existing products. “Delisting is not appropriate for the current situation where market overheating and excess demand are the problems,” he said. “I understand that those advocating for delisting are not necessarily calling for the elimination of the products themselves, but rather expressing the need for equally strong market stabilization measures.”
The financial investment industry has raised concerns that these regulations could repeat the precedent of shrinking the derivatives market in the past. South Korea’s derivatives market contracted sharply after financial authorities raised contract multipliers fivefold in 2012 and increased base deposit requirements to 30 million to 50 million won in 2014 under the banner of investor protection. Trading volumes plummeted at the time, and the market fell out of the global top 10 by 2016. One brokerage research center head noted, “Recent stock market volatility had already been amplified by external variables and supply-demand shifts. The single-stock leveraged ETFs launched near the KOSPI’s peak were merely a factor that partially amplified this—they are not the starting point of market instability.”
Financial authorities indicated they will consider additional regulations if the market does not stabilize. Director Byun said, “Additional alternatives that could be reviewed include setting a renewal cycle requiring one-time pre-education to be refreshed annually, or introducing a prior investment experience requirement so that only those who have first traded index-type leveraged products can purchase single-stock leveraged products—these exist at the idea stage.” However, the option of lowering the leverage ratio of already-listed products from 2x to 1.5x was excluded due to the practical difficulty of requiring beneficiary meetings and the adverse effect of driving investors to overseas alternatives.
Meanwhile, the combined market capitalization of the 16 single-stock leveraged products listed in South Korea has grown approximately 2.7 times, from 4.4 trillion won (approximately $3.0 billion) at launch to 11.9 trillion won (approximately $8.1 billion) as of July 15. Daily trading volume also increased from 10.4 trillion won (approximately $7.0 billion) on launch day to 13 trillion won (approximately $8.8 billion) on July 15. The combined weight of Samsung Electronics and SK Hynix in the KOSPI’s total market capitalization surged from 34% at the end of last year to 52% as of July 15.