"Deposit Raised" Supplementary Measures for Samsung and SK hynix Leveraged ETFs: How Effective Are They? (Comprehensive)

Minimum Cash Deposit Raised to 30 Million Won
Temporary Suspension of New Listings; Expanded Pre-Investment Education
Industry and Experts: "Short-Term Overheating Likely to Subside"
Critics: "Difficult to Ease Market Concentration; Shiftin

"The initial measures are appropriate. The immediate fire is likely to be put out."

"Product-level regulations alone will not be enough to resolve market concentration."

After the government announced supplementary measures regarding single-stock leveraged exchange-traded funds (ETFs) based on Samsung Electronics and SK hynix—which have been identified as the main culprits of the volatility in the domestic stock market—market responses have been somewhat divided. The measures include raising the minimum cash deposit to 30 million won and allowing transactions only in units of 20 shares. Some believe this will help cool down the short-term overheating, but there are also arguments that, despite exhausting all available options, the effectiveness will remain limited. In particular, the very fact that supplementary measures were introduced just a month and a half after the initial launch underscores that the financial authorities failed to fulfill their duties during the product approval process.

A Look at the Supplementary Measures... Temporary Suspension of New Listings and Higher Deposit Requirements

According to the Financial Services Commission and related agencies, the "Supplementary Plan for Single-Stock Leveraged Products (ETFs and ETNs)" announced jointly by the relevant ministries on the afternoon of July 16 consists of: ▲ immediate temporary suspension of new listings and advertisement bans ▲ raising the minimum cash deposit to 30 million won ▲ increasing the trading unit to 20 shares ▲ stricter requirements for the management of price deviation (premium/discount) ▲ expanding the mandatory pre-trade educational program to 3 hours.

Accordingly, starting from early August, investors who wish to trade single-stock leveraged ETFs such as those based on Samsung Electronics or SK hynix will be required to have at least 30 million won in cash in their trading accounts. Previously, for the minimum deposit of 10 million won, 70% of the value could be covered by holdings in stocks or bonds, but going forward, only cash will be recognized. The financial authorities have decided to apply these regulations not only to domestically listed, but also to foreign-listed single-stock leveraged ETFs. Byeon Jaeho, Director General of the Capital Markets Bureau at the FSC, stated, "Regardless of previous investments, investors must maintain more than 30 million won in cash for each new investment or additional purchase of a single-stock leveraged product. Furthermore, even after a certain period following a transaction, the minimum deposit requirement cannot be relaxed."

Source: Financial Services Commission and related government departments

Starting in November, the minimum trading unit for single-stock leveraged products will also be revised. Investors will no longer be able to trade by single shares, but only in multiples of 20 shares—a change expected to reduce trading activity. Until now, these products have typically been issued and traded at prices similar to the standard leveraged fund price (10,000 to 20,000 won), making them more accessible than the underlying assets of Samsung Electronics or SK hynix.

There are plans to introduce further details for handling odd-lot shares (quantities less than 20). Director Byeon explained, "Existing investors who currently hold, for example, 5 shares, will not be obliged to sell after the change," and added, "Since orders for 5 shares will not be accepted through the MTS system, brokers will collect such orders and purchase them at market or near-market prices following a separate procedure."

Additionally, regulators will tighten controls on price deviation, ensuring investors do not purchase single-stock leveraged products at a significant premium or sell at a discount to actual asset value. Specifically, from August, the deviation management threshold for domestic securities firm liquidity providers (LPs) will be strengthened from 3% to 2%. Penalties for intentional violations will be imposed. Fund managers operating ETFs that violate the deviation threshold may be restricted from listing new ETFs, and the procedure for designating an "investment caution issue" will be reduced from three stages to two. Other measures in this supplementary plan include the temporary suspension of new listings until market stability returns, prohibition of marketing activities for existing products, and expanding pre-investment education from two to three hours.

Supplementary Measures Just a Month and a Half After Launch... Industry Evaluations

The measures unveiled today are a response to criticism that leveraged ETF products have amplified market volatility, effectively turning the domestic stock market into a "betting venue" amid recent sharp fluctuations.

The combined market capitalization of 16 single-stock leveraged ETFs jumped from approximately 4.4 trillion won on May 27 to over 15 trillion won just a month later. Even after a market correction, it stood at 11.9 trillion won as of the previous day. Notably, the so-called "short gamma" structure, where investors sell more in sharp downturns and buy more as prices rise, has intensified volatility. Since the launch of leveraged ETFs, the KOSPI market has triggered "sidecar" circuit breakers 19 times and "circuit breakers" 5 times. The background to President Lee Jaemyung's remarks during the financial authorities' work report the previous day—"(Leverage) ETFs are causing a lot of noise. Prepare supplementary measures quickly"—lies here. Single-stock leveraged ETFs are speculative products designed to deliver daily returns equal to plus or minus two times the underlying stock's price movement.

Market watchers note that with the increase in minimum deposit and longer required education, the authorities have practically exhausted all tools at their disposal. Adjusting the leverage multiplier from 2x to 1.5x, as some have suggested, is considered incompatible with the system’s purpose and would need approval from a unitholder meeting, making it unlikely. Investors might also revolt as their returns during rallies would be limited.

Junseo Lee, Professor of Business Administration at Dongguk University, commented, "As an initial emergency measure that had to extinguish the fire in the short run, it is adequate," adding, "The higher required deposit will restrict new investors from entering the market." He continued, "It appears that the authorities have focused more on investor protection. To stabilize the market, they should have widened the permissible price deviation band. From the perspective of market volatility, this is actually a step backward."

An asset management industry insider, who requested anonymity, said, "It should be somewhat effective at curbing the rapid market expansion and concentration. In particular, raising the minimum deposit to 30 million won, banning advertising and marketing, and tightening LP deviation management requirements will help cool down short-term overheating and raise investor awareness of risk," he said.

However, some question the effectiveness. At the current level, the measures are limited in preventing funds from concentrating in certain stocks. The same industry insider commented, "The fundamental causes of market distortion are the excessive capital inflows into specific stocks such as Samsung Electronics and SK hynix, as well as the limited liquidity in the domestic derivatives market. Regulations on the products themselves alone cannot resolve the structural concentration of the broader market." The 30 million won deposit is also lower than the 50 million won figure previously mentioned in the market. Another industry participant, B, remarked, "We need to monitor market reactions. There will likely be different opinions about the extent of asset managers' responsibility."

There has also been criticism that the financial authorities rushed the rollout of leveraged products and passed the burden of responsibility onto the industry. The authorities are inevitably being held accountable for failing to adequately consider everything from product design to investor protection. Further controversy has arisen over the independence of policy decisions by the regulator, especially after an interview by Kim Yongbeom, the Blue House policy chief, about the leveraged products aired before any official announcement. On this point, Director Byeon stated, "The authority and responsibility to introduce leveraged ETFs rest with the FSC. The decision was passed by the FSC board as well," drawing a line under the controversy.

Some continue to call for delisting of such products. Jeong Eui-jeong, President of the Korea Equity Investors Association, argued, "Delisting should be the main principle. These are bad products that inflict losses and social harm on the majority of the public, so although it’s late, we need to move quickly toward abolition." Addressing this, Director Byeon commented, "I understand that this reflects the desire to stabilize the market with very strong measures. However, as the problem is the overheating of leveraged products, it does not meet the conditions for delisting."

This content was produced with the assistance of AI translation services.