Korea Raises Cash Requirement for Single-Stock Leveraged ETFs to $21,700

Cash requirement tripled from $7,200

Minimum trading unit to rise to 20 shares from November

Starting Aug. 5, investors seeking to buy single-stock leveraged exchange-traded funds in South Korea will need at least 30 million won ($21,700) in cash in their accounts. From November, the minimum trading unit for a single order will increase to 20 shares.

The Ministry of Economy and Finance, the Bank of Korea, the Financial Services Commission and the Financial Supervisory Service announced the measures at an F4 meeting on macroeconomic and financial issues held in Seoul's Myeong-dong on July 16. The move follows criticism that single-stock leveraged ETFs have amplified stock-market volatility.

The core of the package is tighter investment requirements for single-stock leveraged products. From Aug. 5, the minimum deposit required to buy those ETFs will be raised to 30 million won ($21,700) from 10 million won ($7,200). Until now, investors could count not only cash but also roughly 70% of the market value of stocks they held toward that threshold. Under the new rules, only cash will count, and investors must hold the full 30 million won to buy single-stock leveraged products.

The same restrictions will apply to single-stock leveraged ETFs listed overseas.

Authorities sharply raise the bar for leveraged Samsung Electronics and SK Hynix ETF trades

New listings suspended for now, though some question effectiveness without trading halts

Financial authorities also said the minimum trading unit for single-stock leveraged ETFs will rise to 20 shares from one share starting in November. At present, one unit of the KODEX Samsung Electronics Single Stock Leverage ETF costs 13,300 won ($9.60), based on the July 16 close. Under the new rule, investors will need 266,000 won ($193). Regulators are effectively raising transaction costs because the products offer exposure at a lower entry price than the underlying stocks, including Samsung Electronics at 255,000 won ($185) and SK Hynix at 1.842 million won ($1,334).

Authorities also banned advertising and promotional event marketing for single-stock leveraged products by asset managers. New listings of those products were suspended from July 16. Mandatory investor education will be extended to three hours from two, and investors who score below 60 on the follow-up assessment will be required to retake the course.

Regulators will also tighten the closing-price tracking-gap management standard for ETF liquidity providers at securities firms to 2% from 3%. If a securities firm violates that obligation through intent or gross negligence, authorities will be able to restrict its liquidity-provision work for new products. If an asset manager breaches acceptable tracking-gap standards, new ETF listings will be restricted.

The package came a day after President Lee Jae-myung ordered officials on July 15 to quickly prepare supplementary measures related to single-stock leveraged ETFs. Criticism has persisted that the products are increasing market volatility. Of the 13 circuit breakers triggered since 2000, five occurred after single-stock leveraged products were introduced.

Retail investors in the products have also posted steep losses. As of July 16, the KODEX SK Hynix Single Stock Leverage ETF closed at 14,585 won ($10.56), down 48.8% from its opening price on May 27. Over the same period, the KODEX Samsung Electronics Single Stock Leverage ETF lost 46.6%.

Market participants say regulators have now deployed nearly every available tool to raise the cost of trading single-stock leveraged products. Lee Hyo-seop, head of the financial industry division at the Korea Capital Market Institute, said the steps could cool speculative excess because most investors in the products hold less than 30 million won ($21,700) in deposits. He added that raising the minimum trading unit should also help curb speculative trading.

Some in the financial investment industry questioned how effective the package will be. One industry official said the measures left out more direct steps such as limits on daily turnover, changes to leverage multiples and trading suspensions, making it unclear how much the new rules will reduce overheating.

Shim Woo-il and Yang Ji-yoon, Hankyung reporters

goodwill@hankyung.com