Democratic Party capital market committee to scrutinize leveraged ETFs

By Joo So-hyun, The Herald Business

The Democratic Party of Korea's "Korea Premium K-Capital Market Special Committee," which leads the party's capital market revitalization agenda, is moving to review the regulatory framework for leveraged exchange-traded funds. The panel's concern is that leveraged ETFs are amplifying share price volatility at a time when a semiconductor boom is drawing massive capital flows into Samsung Electronics and SK hynix.

The committee will hold a closed-door internal review meeting Monday to discuss capital market revitalization policy for the second half of the 22nd National Assembly. A senior committee official said the panel is "conducting a probe to assess the current state" of leveraged ETFs.

The committee plans to examine a range of options — from whether to keep leveraged ETF products on the market at all to tightening entry requirements — and then continue discussions with financial regulators. Another committee official said, "If leveraged ETFs breed distrust in the stock market, they weaken the capital market — isn't that similar to short selling?" adding, "We are reviewing from scratch whether regulation is needed or whether minor adjustments will suffice."

Leveraged ETFs seek to deliver a multiple of the returns of an underlying asset and are popular among investors seeking high returns at high risk. Single-stock leveraged ETFs tracking Samsung Electronics and SK hynix were first introduced at the end of last year, as part of an effort to redirect investment demand — swollen by a high exchange rate — from overseas markets back into domestic ones.

Concerns that leveraged ETFs are magnifying market volatility have been raised persistently both inside and outside the party. Financial Supervisory Service Governor Lee Chan-jin has in effect acknowledged the policy failure of the single-stock leveraged ETFs tracking Samsung Electronics and SK hynix, and has signaled the need for investor safeguards.

At a press briefing last month, Lee said the products' extreme turnover rates "are producing results that only fatten brokerages," adding, "I am personally deeply concerned that the actual players gain nothing while only the systems managing and operating them profit."

Democratic Party lawmaker Lee Eon-ju wrote on her Facebook page Wednesday that "financial authorities should, even now, carefully re-examine the impact of single-stock leveraged products on the market and actively consider a phased reduction of their influence to protect retail investors and ensure market stability."

The Democratic Party, which is relaunching its capital market legislation drive, appears to have reached a consensus on the need to reform the regulatory regime around leveraged ETF products. The underlying concern is that excessive concentration in leveraged ETFs could impede the healthy development of the capital market.

The committee was established after the Lee Jae-myung government took office last year as an intraparty panel tasked with achieving a "Kospi 5000" target. After the Kospi reached 5,000 in February, it was renamed to its current form. The committee has put forward legislative priorities including normalizing price-to-book ratios, revitalizing the Kosdaq, regulating stablecoins and introducing a stewardship code.

The Democratic Party has also signaled its intent to push through its remaining capital market legislation in the second half of the year, having recently forced through the election of 11 standing committee chairs allocated to the party — securing the chairmanships of the policy affairs committee and the finance and economy planning committee. Last year, when the People Power Party held the policy affairs committee chair and bill processing stalled, the Democratic Party routed around the blockage by amending the Commercial Act three times through the legislation and judiciary committee — which it chaired — to enshrine duties of loyalty to shareholders, mandatory treasury share cancellation and cumulative voting. In the first half of the Assembly session, a capital markets act amendment including a "fair value" provision to prevent share price suppression in mergers between affiliates of listed companies remains pending at the bill review subcommittee stage.

The Democratic Party is also pursuing policy continuity by retaining roughly half of its members who served on the policy affairs committee in the first half. Democratic Party members of the committee are expected to discuss legislative strategy for the second half of the Assembly session at a National Assembly member workshop in Yongsan-gu, Seoul, on Thursday, and plan to hold a plenary meeting next week to handle agenda items including the appointment of a floor leader.