South Korean authorities are preparing countermeasures for single-stock leveraged ETFs tracking Samsung Electronics and SK Hynix, which have been identified as a key factor in market volatility one and a half months after their launch. Professor Lee Jun-seo from Dongguk University's Business School told Herald Economy on the 13th that while single-stock leveraged ETFs are not the primary cause of volatility, they have amplified market fluctuations. The regulatory discussion comes as these two stocks account for over half of the KOSPI market capitalization, with the 16 leveraged products based on them reaching 16 trillion won in assets under management, creating concentrated liquidity pressure that has increased market volatility through liquidity provider rebalancing processes.
Professor Identifies Single-Stock Leveraged ETFs as Contributing Factor to Volatility
Professor Lee Jun-seo from Dongguk University stated on the 13th that single-stock leveraged ETFs are "not the main culprit but an accomplice" in market volatility. Lee pointed out that South Korea has only 2 companies with 16 products totaling 16 trillion won in AUM, compared to the United States which has 400 single-stock leveraged ETFs covering 100 companies with approximately 50 trillion won in total AUM. Lee stated that "the market share of these two stocks is too high, causing concentrated liquidity and increased market volatility," and noted that "liquidity provider rebalancing during ETF creation and redemption processes has further amplified volatility."
Lee proposed introducing a separate volatility interruption mechanism specifically for single-stock leveraged ETFs. He suggested considering a system that would halt single-stock leveraged ETF trading when the trading volume of the leveraged product reaches a certain percentage of the underlying stock's trading volume. Lee expressed a negative view on strengthening tracking error controls currently being discussed in the market.
Industry Proposes Leverage Ratio Reduction and Expanded Stock Coverage
The securities industry is discussing adjusting the current 2x leverage ratio to 1.5x. A securities company official stated that "if the goal is to reduce the risk of the product itself, we could consider lowering the 2x ratio to 1.5x," noting that "since 1.5x products already exist in the market for exchange-traded notes (ETNs), it would be systemically feasible."
An asset management industry official argued that "if the door had been opened from the beginning to the top 20-30 stocks by market capitalization, including Hyundai Motor, Naver, and major financial stocks, funds would have been dispersed and the current concentration would have been much less severe." Another asset management executive stated that realistic alternatives include "mixing Samsung Electronics and SK Hynix into a single product, strengthening LP responsibilities, and enhancing asset manager oversight."
The KOSPI 200 leveraged ETF has traded for over 16 years without generating the same level of market-wide volatility controversy as the current situation.
Regulators Consider Deposit Requirements and Investor Education Measures
The most likely initial countermeasure is raising the minimum deposit requirement and strengthening investor education. Proposals include raising the current 10 million won minimum deposit to 50 million won and enhancing education on product risks. A securities company official stated that "there will be an effect of reducing trading volume in the short term by blocking small investors' entry," but questioned "whether it will help ease volatility given that existing investors are already substantial."
Korea Exchange Listing Rules Present Delisting Challenges
Delisting is not practically straightforward. Korea Exchange's securities market listing regulations specify ETF delisting grounds including insufficient net asset value, failure to track the underlying index, absence of liquidity providers, and investment trust termination, but delisting solely because "market volatility is high" is difficult. While a comprehensive clause exists allowing delisting "when the exchange recognizes it as necessary for public interest and investor protection," no precedent exists for delisting an ETF based on this provision.
FAQ
Q: What did Professor Lee Jun-seo from Dongguk University say about single-stock leveraged ETFs on the 13th?
A: Professor Lee Jun-seo stated on the 13th that single-stock leveraged ETFs are "not the main culprit but an accomplice" in market volatility. He noted that South Korea has only 2 companies with 16 products totaling 16 trillion won in AUM, and that liquidity provider rebalancing during ETF creation and redemption processes has amplified volatility.
Q: What regulatory measures are being considered for single-stock leveraged ETFs in South Korea?
A: Proposed measures include raising the minimum deposit requirement from 10 million won to 50 million won, strengthening investor education, adjusting the leverage ratio from 2x to 1.5x, introducing volatility interruption mechanisms, and expanding the range of eligible underlying stocks beyond Samsung Electronics and SK Hynix.
Q: How does South Korea's single-stock leveraged ETF market compare to the United States?
A: According to Professor Lee Jun-seo, the United States has 400 single-stock leveraged ETFs covering 100 companies with approximately 50 trillion won in total AUM, while South Korea has only 2 companies with 16 products totaling 16 trillion won in AUM, creating a concentration issue.
