ETF, Derivatives Policy Drive Stalls After Single-Stock Leverage Roils Market

Single-stock leverage stalls policy push

Authorities grow wary after volatility picks up

Government and industry efforts to foster exchange-traded funds and derivatives are losing momentum. Financial authorities and market participants are increasingly reluctant to roll out ETF and derivatives measures tied directly to market flows after the recent launch of single-stock leveraged products heightened stock-market volatility.

According to the financial investment industry on Aug. 13, discussions on introducing fully active ETFs, a measure financial authorities had been pursuing, have effectively stopped.

Under current law, an active ETF faces delisting if its correlation with its benchmark stays below 0.7 for three consecutive months. Market participants have long argued the rule leaves active ETFs little room to operate flexibly. The Financial Services Commission had planned to prepare a revision to the Capital Markets Act in the first half of this year that would ease the correlation requirement and pave the way for fully active ETFs.

But that proposal has also stalled as regulators focus on follow-up measures for single-stock leveraged ETFs. In the asset-management industry, some say authorities should at least first consider easing the delisting rule to six consecutive months below the threshold from the current three, given the delay in introducing fully active ETFs.

A separate plan to diversify weekly option expiries, which financial authorities and the Korea Exchange said at the start of this year they would pursue, has also slipped down the priority list. Regulators had originally planned to expand expiries for Kospi 200 and Kosdaq 150 weekly options to Monday through Friday from the current Monday and Thursday schedule, as part of a push to support covered-call ETFs.

But concerns are also rising in and around the authorities that broadening weekly option expiries too quickly could rekindle market volatility that had only just begun to ease. Because expiries would arrive every trading day, demand for ultra-short-term derivatives trading could jump sharply.

The Korea Exchange is also taking a cautious approach to listing ETF weekly options, which had been planned for the second half of this year. “We will review measures such as diversifying weekly option expiries while checking market demand,” a Korea Exchange official said.

Shim Woo-il, Korea Economic Daily reporter, goodwill@hankyung.com