FSC Chief Says Single-Stock Leveraged ETFs Fuel Volatility, Vows Bold Further Steps

Kim Byoung-hwan, chairman of South Korea's Financial Services Commission, said July 29 that authorities are taking very seriously the sharp rise in market volatility linked to single-stock leveraged exchange-traded funds.

Kim made the remarks at a policy briefing before the National Assembly's Political Affairs Committee in response to a question from People Power Party lawmaker Park Dae-chul. Park asked whether Kim agreed with the view that the plunge in single-stock leveraged products was a man-made failure caused by the Financial Services Commission and the Financial Supervisory Service.

Kim said the authorities bear heavy responsibility as the officials ultimately accountable for the financial market.

He said regulators would move swiftly on supplementary measures and would take additional steps aggressively if needed.

Lawmakers on the committee proposed raising additional deposit requirements and adjusting leverage ratios for single-stock leveraged products. They also suggested restricting new purchases to professional investors.

Kim said those proposals would be reviewed.

He said setting the cash deposit requirement at 30 million won ($21,700) could reduce daily trading volume by 60%. Depending on market conditions, authorities would consider raising the requirement further or pursuing other options, he added.

Kim Hyun-jung, a lawmaker from the Democratic Party, asked about the need to introduce a variable leverage structure that would allow leverage ratios to be adjusted.

Kim said adjusting leverage ratios could help ease volatility. He added that authorities would examine how to reflect matters such as meetings of fund beneficiaries during the legislative revision process.

Lawmakers also raised a proposal to cap investment size. Kim said one option would be to set a limit allowing investors to put only a certain portion of their total funds into such products.

Financial authorities are also reviewing ways to stagger rebalancing times. They are separately examining measures to reduce trading volume.

Lee Chan-jin, governor of the Financial Supervisory Service, also said authorities are taking the single-stock leverage issue seriously.

The watchdog would do its best to minimize volatility, Lee said.

He also explained remarks he made at a press briefing last month that regulators should have blocked the products "even by lying down in front of them." Lee said the comment was intended to protect investors at a time when volatility had emerged in the underlying shares and had no other meaning.

Han Kyung-woo, Hankyung.com reporter case@hankyung.com