By Heejin Kim, Sherin Sunny and Cynthia Kim
SEOUL, July 16 (Reuters) – South Korea said on Thursday it will temporarily ban new listings of exchange-traded funds (ETFs) that are tied to certain major technology firms, while raising minimum required deposits for retail investors to invest in such products, in an effort to curb market volatility.
The Financial Services Commission said it will halt new listings until market conditions stabilize. The minimum cash balance required to trade single-stock leveraged ETFs will be raised to 30 million won ($20,300) from 10 million won, starting on August 5.
The new measures mark a sharp pivot by South Korean regulators, following the recent approval of domestic single-stock leveraged ETFs linked to Samsung Electronics and SK Hynix in late May.
A surge in popularity of these leveraged ETFs tied to two chipmakers has been blamed by politicians and investors for increasing volatility through frequent and large rebalancing trades that are needed on a daily basis.
Leveraged ETFs use derivatives to replicate bets made with borrowed money, promising a multiple of a stock’s daily returns. The products can create sizeable trading activity that exceeds real investor flows, as purchases need to be scaled up to mirror a leveraged position. But the funds tend to underperform over time because of fees and trading costs, while also exposing investors to sharper losses if the underlying investments decline in value.
As part of its measures to protect investors, the government will require asset managers to retain qualified liquidity providers (LPs) and hold them accountable for any large pricing disparities.
“Effective this August, broker-dealers and asset management companies (AMCs) will be mandated to retain high-quality LPs to assume formal accountability for managing these pricing disparities,” said Byun Je-ho, the director general for the capital markets team at the FSC.
“Why are we holding asset managers accountable? Because they are the ones that can hire quality LPs to better manage price disparities.”
Byun said investors will be subject to higher minimum deposit requirements for both domestic- and foreign-listed, single-stock leveraged products.
In addition, investors must maintain a cash balance of at least 30 million won as a basic margin deposit each time they trade new single-stock leveraged ETFs.
FSC INTERVENTION IS ‘OVERDUE’
Inki Cho, a senior financial market strategist at Exness, an online trading platform, said the FSC intervention was “overdue.”
“This is a correction of a known policy error,” he said. “Likely measures include tighter leverage caps, stricter retail suitability requirements, or volatility-linked circuit breakers on these specific products.”
“The announcement itself is a near-term risk though – aggressive measures could trigger a rush to exit ahead of implementation, amplifying the very volatility the FSC is trying to fix.”
Over the longer term, however, it would be a net positive for market credibility, he said.
The KOSPI plunged more than 6% on Thursday, heading into a bear market, though it remained the world’s best-performing major equity market this year.
In June, the head of South Korea’s market watchdog offered a rare mea culpa, saying the regulator had been too hasty in approving such products.
The ETFs helped drive retail investors’ borrowed investment into equities to a record 60 trillion won ($40.39 billion) as of the end of May.
($1 = 1,485.5000 won)
(Reporting by Heejin Kim and Sherin Sunny; Additional reporting by Jihoon Lee and Sameer Manekar; Editing by Muralikumar Anantharaman, Sam Holmes and Thomas Derpinghaus)