South Korea's Financial Services Commission announced new regulations for single-stock leveraged ETFs on the 16th, raising the base deposit requirement from 10 million won to 30 million won and restricting deposits to cash only. The measures target Samsung Electronics and SK Hynix leveraged ETFs amid concerns over market concentration, also increasing minimum trading units from 1 share to 20 shares and extending mandatory education from 2 to 3 hours. The regulator tightened liquidity provider deviation management standards from 3% to 2% to reduce volatility. Individual investors criticized the deposit hike as unfair given securities firms offer only 1% interest on deposits, arguing the rules disproportionately burden retail traders while sparing regulators and brokerages. The changes respond to overheating in single-stock leveraged ETF markets where concentrated buying has amplified volatility in underlying stocks.
Financial Services Commission Raises Deposit Requirements and Restricts Cash-Only Deposits
The Financial Services Commission announced on the 16th that the base deposit standard for domestic and overseas single-stock leveraged ETFs will increase from 10 million won to 30 million won, with only cash accepted as base deposits. The regulator expanded the minimum trading unit from 1 share to 20 shares and extended mandatory pre-education from 2 hours to 3 hours. For liquidity providers, the commission strengthened the closing price deviation management obligation standard from 3% to 2%. These measures apply to leveraged ETFs tracking individual stocks including Samsung Electronics and SK Hynix.
Investors Criticize Fairness of New Deposit Rules
Investors expressed strong dissatisfaction with the raised entry barriers. Critics questioned the logic of requiring 30 million won in deposits while securities firms pay only around 1% interest, comparable to bank deposit rates. One 21-year-old investor stated that declining stock prices make it difficult to execute desired purchase volumes, let alone defend positions. Complaints flooded in with remarks such as "Does it make sense to always keep 30 million won deposited while receiving interest worse than bank deposits?" and "Are you telling us to take out loans to secure deposit funds?" Investors noted the regulation targets only individual traders while deposit interest rates remain unchanged. Concerns emerged that investors may sell holdings in other stocks to secure the required deposits, potentially intensifying concentration in Samsung Electronics and SK Hynix rather than alleviating it.
Experts Call for Structural Reforms Beyond Short-Term Measures
Experts anticipate the measures will somewhat cool leveraged investment enthusiasm. Lee Hyo-seop, senior researcher at Korea Capital Market Institute, stated that limiting deposits to cash rather than substitute securities like general ETFs or bonds will significantly reduce actual participation and ease concentration in leveraged ETFs. Financial authorities cited the 2011 case when they introduced a 15 million won base deposit system during overheating in the equity-linked warrants (ELW) market, expecting similar market stabilization effects from the current measures.
However, experts pointed out that concentrating regulations on individual investors rather than the financial authorities who approved the products and securities firms that launched them lacks fairness. They argued that priority should be given to addressing the structure that allows leveraged ETF assets under management to grow excessively, rather than merely suppressing investment demand. When buying pressure floods leveraged ETFs and securities firms run short of inventory, they request new ETF creation from asset management companies. Asset managers issue additional ETFs accordingly and purchase additional underlying assets proportional to the increased net assets, amplifying market volatility as buying pressure on underlying assets grows.
Yoon Seon-jung, professor of business administration at Dongguk University, stated that "the fees securities firms bear when requesting new leveraged ETF creation from asset managers should be raised." Higher new creation fees would give securities firms incentive to control inventory, at minimum preventing ETF scale from expanding as excessively as at present. From this perspective, some experts suggested reconsidering the tightened deviation rate standard. Lee Jun-seo, professor of business administration at Dongguk University, warned that "lowering the deviation rate standard to 2% is a policy that goes against the times," adding that "excessively narrowing the allowable deviation range could actually increase new creation to match prices."
FAQ
What did South Korea's Financial Services Commission announce on the 16th regarding leveraged ETFs?
The Financial Services Commission announced on the 16th that it will raise the base deposit requirement for single-stock leveraged ETFs from 10 million won to 30 million won and restrict deposits to cash only. The regulator also increased minimum trading units from 1 share to 20 shares, extended mandatory education from 2 hours to 3 hours, and tightened liquidity provider deviation management standards from 3% to 2%.
Why are investors criticizing the new leveraged ETF deposit rules?
Investors criticize the rules as unfair because securities firms pay only around 1% interest on deposits while requiring 30 million won to be kept deposited, and the regulations target only individual investors rather than the authorities and firms that approved and launched the products. Investors also worry the deposit requirement may force them to sell other holdings, potentially worsening concentration in Samsung Electronics and SK Hynix stocks rather than alleviating it.
