Photo: Financial Services Commissioner Lee Eok-won reports to President Lee Jae-myung at the Blue House. Credit: Yonhap News.
On July 20, the Ministry of Finance and Economy 재정경제부 announced new regulations for leveraged exchange trade funds (ETFs), five days after President Lee Jae-myung 이재명 대통령 demanded that the ministry take action against the ETFs that contributed the stock market’s wild volatility. The VKOSPI index, measuring the volatility of KOSPI, South Korea’s main stock market, has soared above 90 in the recent weeks, worse than the volatility during the 2008 Global Financial Crisis.
Starting in August, investors who wish to buy a single-ticket ETF - leveraged financial product betting on the rise of a single stock, typically that of the red-hot semiconductor manufacturers like SK Hynix SK 하이닉스 or Samsung Electronics 삼성전자 - must post a cash deposit of KRW 30m, up from the KRW 10m deposit of which only KRW 3m had to be in cash. The government also temporarily prohibited the offering of any new leveraged ETF products, and will require that investors buy at least 20 shares at a time. However, the government will not shut down any leveraged ETFs that are currently trading.
South Korea permitted a single-ticket leveraged ETF for the first time in May this year, in an attempt to woo the investors who were investing in similar products involving South Korean stocks in Hong Kong and other countries’ stock exchanges. With the get-rich-quick minded individuals collectively investing KRW 10t (USD 6.8b) in these products, single-ticket leveraged ETFs introduced massive volatility to the South Korean stock market that was already experiencing volatility, due to the overweight of semiconductors manufacturers whose demands are prone to quick upticks and downturns.
