Lee Eogwon and Lee Chanjin: "We Take Responsibility for Volatility Triggered by Leveraged ETFs Very Seriously"

On July 29, Finance Commission Vice Chairman Lee Eogwon stated regarding the single-stock leveraged Exchange Traded Funds (ETFs), which have become embroiled in controversy over increased volatility in the Korean stock market, "We are taking seriously the fact that investor confidence in the capital market has been shaken."

Vice Chairman Lee made these remarks while attending the National Assembly's Political Affairs Committee's work report session on this day. When questioned about the rise in market volatility following the launch of the so-called 'Samsunnikseu' leveraged ETFs, Lee responded, "The recent expansion in market volatility is not due to a single factor; rather, multiple complex factors are involved."

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He explained, "First of all, uncertainty in the global semiconductor industry has become extremely heightened. Every time the news comes out about whether artificial intelligence (AI) investment is sustainable or how visible China's pursuit has become, expectations and concerns fluctuate, causing significant volatility in the global semiconductor industry. The concentration of Samsung Electronics and SK hynix in our stock market is extremely high, so the extent to which shocks in the semiconductor sector impact our market is also large."

He also acknowledged the criticism that the Korea-style volatility index surged after the launch of leveraged ETFs, adding, "In the case of leveraged products, processes such as rebalancing have become factors that amplify market volatility." While he admitted that single-stock leveraged ETFs have been a significant factor behind the recent sharp decline of the KOSPI, he also drew a line by stating that leveraged ETFs should not be solely blamed for the heightened volatility in the market.

In response, Assemblyman Park Dae-chul of the People Power Party insisted, "'Saying that it is inappropriate to blame leveraged ETFs alone for the increased volatility' amounts to evading responsibility," and argued that the current situation is a man-made disaster caused by the financial authorities. He cited several reasons: the launching entities of the leveraged ETFs are the Financial Services Commission and the Financial Supervisory Service; the approval process was carried out in haste; and Financial Supervisory Service Governor Lee Chanjin had previously stated, "We should have stopped it even if it meant lying down in protest." Park especially pointed out that the evaporation of KOSPI’s market capitalization over the past month amounted to approximately 2,389 trillion won, exceeding the national budget of 728 trillion won by more than three times, and asked Vice Chairman Lee Eogwon and Governor Lee Chanjin, "Do you agree that the single-stock leveraged ETF crash is a man-made disaster caused by the Financial Services Commission and the Financial Supervisory Service?"

Vice Chairman Lee replied, "In hindsight, I take the fact that market volatility has greatly increased very seriously." Governor Lee Chanjin also commented, "We will strive to minimize market-related volatility. We take this matter extremely seriously." When Assemblyman Park repeatedly asked, "Are you saying that the issue itself is grave, or that the responsibility is?" they responded, "As the financial authorities, we are ultimately responsible for the financial market, and we take that responsibility very seriously," and, "From the perspective of the Financial Supervisory Service as well, we take our share of responsibility very seriously." 

On this day, Vice Chairman Lee addressed criticisms that the announcement of countermeasures was delayed by saying, "Since the launch on May 27, we have been continuously monitoring the market impact and gathering opinions from related ministries and industry experts. There was a period of preparation, so we made the announcement on July 16." The previously released supplemental measures include: ▲ Immediate temporary suspension of new listings and an advertising ban ▲ Raising the minimum cash deposit to 30 million won ▲ Expanding the trading unit to 20 shares ▲ Strengthening regulatory standards on price divergence ▲ Increasing the mandatory pre-trading education to 3 hours.

Regarding additional suggestions from lawmakers to not stop at these measures but also to raise the minimum deposit, adjust leverage ratios, and limit trading primarily to professional investors, Vice Chairman Lee said, "Overall, most market participants believe that the supplementary measures announced on the 16th will be quite effective." He added, "We will continue to monitor market conditions and, if necessary, consider raising the deposit or implementing various additional measures."

In particular, concerning the suggestion to adjust leverage ratios, Lee commented, "Lowering the leverage would be effective in terms of reducing volatility," but added, "It depends on how we consider matters like the beneficiary assembly and investor-related issues, which we will review during the legislative process." Financial authorities have previously stated that lowering the leverage ratio from 2x to 1.5x would deviate from the system's original intention and would be difficult to implement in reality since it requires passing through a beneficiary assembly.

Additionally, Vice Chairman Lee dismissed suspicions that the financial authorities were pressured by external forces into launching the leveraged ETF products, stating, "Since the end of last year, there have been discussions in the market, media, and research institutions raising the issue that such products are available overseas but have been blocked in Korea. In response, we went through a number of processes, including amending relevant enforcement ordinances and coordinating with related ministries, to improve the system." The controversy over the independence of policy decisions by financial authorities had intensified after media interviews reported that the former Blue House policy chief, Kim Yongbeom, ordered the product's launch before the listing of leveraged products.

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