Korean stocks melted again! Chip stock leveraged ETFs amplify fluctuations, brokerage firms discuss raising investment thresholds

Korean stocks melted again! Chip stock leveraged ETFs amplify fluctuations, brokerage firms discuss raising investment thresholds.

As concerns about investor losses and market volatility caused by Samsung Electronics and SK Hynix leveraged exchange-traded funds (ETFs) intensify, South Korea's securities industry is considering launching a series of investor protection measures, including raising minimum deposit requirements.

According to reports, on July 14, the Korea Financial Investment Association and the CEOs of ten leading securities firms held an emergency meeting in Seoul to discuss the current status of individual stock leveraged ETFs and investor protection measures.

Participating institutions stated that although individual stock leveraged ETFs provide investors with more choices and enrich product diversity, their "leverage effect" will amplify losses, even if the investment amount is small, and lead to rapid losses, even in sideways and volatile market conditions.

To prevent over-leveraged investments, participants agreed to consider raising the minimum deposit requirement for investing in such leveraged products from the current level of 10 million won ($6,714). The meeting also discussed how to reduce the impact of rebalancing transactions on the capital market.

According to data from the Korea Capital Market Research Institute, since the launch of related leveraged ETFs, the stock trading volume required for daily rebalancing is estimated to be approximately 700 billion-2.1 trillion won.

Participants agreed that it is necessary to spread out rebalancing trading times to avoid concentration during the closing period, and to further strengthen the market stabilizer role of liquidity providers. However, this meeting did not finalize specific measures such as increasing the minimum deposit.

Since the customer profiles of each securities firm are different, in the future it will be up to each institution to evaluate and discuss the appropriate threshold standards.

The Korea Financial Investment Association and the securities industry plan to continue to monitor the trading trends and investor behavior of individual stock leveraged ETFs and cooperate with other regulatory measures that may be introduced by the government.

Hwang Sungyeop, president of the Korea Financial Investment Association, said: "Individual stock leveraged products can be used as a tool to broaden investors' choices, but it also requires the industry to assume greater responsibility in protecting investors." Earlier this week, Lee Chan-jin, director of the South Korean Financial Supervisory Service (FSS), also called on asset management companies to strengthen ETF management to better protect financial consumers.

He said at the time that with the exchange-traded fund (ETF) market nearly doubling in size this year, the role and responsibility of asset managers in selling and managing ETFs is becoming increasingly important.

Last month, Li Canzhen said that he regretted not preventing the listing of individual stock leveraged ETFs and warned that its negative effects had significantly expanded.

Such products aim to achieve double the return of the underlying stock, but their mechanical rebalancing process forces them to buy more when prices rise and sell more when prices fall, a mechanism that can significantly amplify market volatility.

In fact, as South Korea's stock market has experienced frequent surges and falls in recent times, the country's regulators and members of Congress have issued warnings, targeting individual stock leveraged ETFs.

Some members even called for "strong rectification measures" including delisting for South Korea's leveraged ETFs that track Samsung Electronics and SK Hynix.

At the same time, global investment banking giant Goldman Sachs also recently analyzed that mechanical selling of individual stock leveraged ETFs exacerbated the decline of the KOSPI index during the decline. On Wednesday, South Korea's stock market rose sharply and once again triggered the "sidecar mechanism" (suspending programmed trading).

As of press time, the KOSPI index rose more than 7% to 7353.72 points. Among them, the share prices of Samsung Electronics and SK Hynix rose by nearly 7% and more than 11% respectively. Shortly after the opening of trading today, the Korean Exchange initiated a temporary suspension mechanism for the KOSPI index and suspended programmed trading for 5 minutes.

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