From the End of Next Month, Issuers Must Disclose 'Maximum Loss Rate' When Launching Leveraged Funds

Core Fund Risk Standard to Be Introduced Starting September 30
Disclosure Required for Past Losses Exceeding 20% in Similar Products

Going forward, when launching high-risk funds such as leverage and inverse products, issuers will be required to disclose the 'maximum potential loss rate' in the prospectus. Additionally, if the management company has previously launched a fund of the same type that experienced a loss exceeding 20%, the company must also disclose the product and the scale of the loss.

Yonhap News Agency

On August 25, the Financial Supervisory Service announced it had established the 'Standard Guidelines for Key Fund Risks' and revised the relevant disclosure forms, which will take effect starting September 30. The move comes after incidents such as the total loss of overseas real estate funds, and is intended to help retail investors more easily understand the risks involved in public funds by enhancing risk disclosure.

The guidelines apply to 10 types of funds: overseas real estate funds, overseas REITs, equity-linked funds (ELF), derivative-linked funds (DLF), leverage, inverse, covered call, target conversion, gold spot, and overseas fund-of-funds. These are funds that have experienced large-scale losses in the past or are structurally high-risk, increasing the possibility that investors may misinterpret their characteristics.

Accordingly, starting at the end of next month, when introducing new funds of these types, companies must clearly spell out the key investment risks in the prospectus. All must include a statement on "principal loss risk," and up to three additional specific risks relevant to each fund type must be included: for example, currency fluctuation risk (for overseas real estate funds), leverage risk such as the negative compounding effect (for leverage and inverse funds), and risk due to fluctuation of underlying assets (for ELF and DLF).

 

For leverage and inverse products, disclosure of the maximum loss rate under extreme scenarios is also required. For instance, if the underlying asset of a double leverage single-stock product falls by 30% in a single day (the daily limit), the product's daily maximum loss rate could be expected to reach 60%.

If, among the company’s past products of the same type, there is any instance where the loss rate exceeded 20%, the company must publish the fund name, investment region or asset, date of loss, and the amount lost. If the management company has no operational experience with similar products, that fact must be clearly stated as well.

The standard for calculating previous loss rates will also differ according to fund characteristics. For closed-end funds, which are hard to redeem before maturity, the cumulative loss rate since set-up will be used. For open-ended funds such as ETFs, which allow for additional subscriptions and redemptions, the maximum drawdown (MDD) will be used to indicate the largest loss an investor could have experienced. MDD measures the loss rate from the peak to the lowest point of the investment asset.

An official from the Financial Supervisory Service stated, "This standard guideline sets the minimum requirements that must be included in a fund's securities registration statement," and added, "Each management company should strengthen its internal controls so that investors can understand and assess the risks involved in fund investments."

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