South Korea Tightens Entry Threshold for Single-Stock Leveraged ETFs: From July 31, Individual Investors Need 30 Million KRW in Cash

Odaily Planet Daily News: The South Korean Financial Services Commission (FSC) has announced the early implementation of strengthened base margin requirements for single-stock leveraged ETFs and ETNs by the end of July. Starting July 31, individual investors wishing to newly purchase or make additional purchases of single-stock leveraged ETFs/ETNs must hold at least 30 million KRW in cash as base margin in their accounts. This measure applies to single-stock leveraged ETFs and ETNs listed both domestically and overseas. The financial authorities stated that the decision to advance the reinforcement of investor protection measures was made due to the rapid growth in market capitalization and trading volume of these products since their launch on May 27, coupled with increased volatility in the stock prices of major memory chip companies.

Data shows that the total market capitalization of the 16 single-stock leveraged products currently on the market has grown from 4.4 trillion KRW on May 27 to 11.9 trillion KRW as of July 15, while trading volume has also risen from 10.4 trillion KRW to 13 trillion KRW. Under the previous regulations, individual investors purchasing single-stock leveraged products needed to meet a base margin requirement of 10 million KRW, with assets such as stocks, ETFs, and bonds being convertible and usable as margin. After the new regulations take effect, the base margin standard will be raised to 30 million KRW, and only cash assets will be accepted; securities-type assets will no longer be convertible for margin purposes.

Furthermore, proceeds from securities sales can only be counted towards the base margin after settlement is completed on a T+2 basis and the funds are actually credited. Loan amounts secured by using the proceeds from securities sales as collateral are also not included in the margin scope. The FSC stated that this measure aims to limit high-frequency circular trading behavior where investors sell their positions and immediately repurchase leveraged products on the same day.

For existing investors making additional purchases, the 30 million KRW cash margin standard also applies, but selling operations are not subject to the margin restrictions.

Earlier, on July 16, the South Korean financial authorities had already suspended the new listing of single-stock leveraged ETFs/ETNs and restricted related advertising. Subsequently, they plan to strengthen the management mechanism for product premium rates, shorten the designation process for investment warning items, and promote adjustments to trading units.

The FSC stated that it will continuously monitor the market trends of related products and, if the market overheating phenomenon is not alleviated, will consider taking further complementary measures. (Chosun)