Korea to Require $21,700 Cash Deposit for Single-Stock Leveraged ETFs, ETNs From July 31

Investors Must Hold $21,700 in Cash to Trade

Investors seeking to buy leveraged exchange-traded funds and exchange-traded notes tied to a single stock, including Samsung Electronics and SK Hynix, will need to keep at least 30 million won ($21,700) in cash in their accounts starting July 31.

South Korea’s financial authorities had originally planned to phase in a higher minimum deposit requirement from Aug. 5 and separately stop recognizing substitute collateral from mid-August. They have now decided to apply both measures together from the end of July.

The Financial Services Commission, the Financial Supervisory Service and the Korea Exchange said on July 24 that tougher minimum deposit rules for single-stock leveraged products will take effect on July 31.

Retail investors currently need to meet a 10 million won ($7,200) minimum deposit to buy those products. As much as 70% of the market value of substitute collateral, including stocks, ETFs and bonds, has also counted toward that requirement.

From July 31, the minimum deposit will rise to 30 million won ($21,700), and substitute collateral will no longer qualify. Investors will therefore need at least 30 million won in cash in their accounts to make new or additional purchases of single-stock leveraged ETFs and ETNs.

Authorities had initially planned to raise the minimum deposit in early August and exclude substitute collateral from mid-August. They moved both steps forward after investment funds flowed rapidly into single-stock leveraged products and after coordinating implementation schedules with securities firms and system developers.

The tighter standard will apply equally to Korea-listed products tied to Samsung Electronics and SK Hynix, as well as leveraged ETFs and ETNs linked to overseas single stocks such as Tesla and Nvidia. Existing investors will also need to meet the 30 million won cash requirement for additional purchases, though there will be no restriction on selling current holdings.

The rules for recognizing deposits will also be tightened. Until now, when investors sold stocks they held, the proceeds were counted as cash deposits on the trade date. Going forward, those proceeds will be recognized only after settlement is completed and the cash is actually credited, or two business days after the sale date. Loans backed by sale proceeds will also be excluded from deposit calculations.

The practice of easing deposit requirements for investors with trading experience will also end. Securities firms currently can lower the deposit threshold after three months of trading activity based on an investor’s experience. Under the new rules, they will no longer be allowed to relax the requirement and may only strengthen it.

Financial authorities plan to recommend that securities firms that fail to complete related system development by July 31 restrict new trading in single-stock leveraged products.

Noh Jung-dong, Hankyung.com reporter dong2@hankyung.com