Democratic Party panel says raising minimum deposit for single-stock leverage ETFs to W30m will stabilize market

The Democratic Party of Korea's Korea Premium K-Capital Markets Special Committee said Monday it would monitor the effects of investor-protection measures announced by financial regulators on single-stock leveraged exchange-traded funds before deciding whether additional steps are needed. The committee also confirmed the technical feasibility of reducing the leverage multiplier from two times to 1.5 times, a proposal that has recently been floated.

The committee held a CEO forum Monday afternoon at the Korea Financial Investment Association in Yeouido, Seoul. Attendees included Korea Financial Investment Association President Hwang Seong-yeop and the heads of Kyobo Securities, Kiwoom Securities, Shinhan Investment, Mirae Asset, Samsung Asset Management and KB Asset Management.

The committee said measures to strengthen investor protections on single-stock leveraged products — including raising the minimum deposit requirement and tightening investor education — would go a substantial way toward reducing market volatility.

Kim Nam-geun, the committee's secretary, told reporters after the forum that raising the minimum deposit to 30 million won ($20,500) was expected to cut the number of eligible investors from more than 100,000 to around 10,000 and reduce trading volume by roughly 60 percent. "That should bring considerable stability," he said.

He added that if the higher deposit threshold proved insufficient, the committee was considering raising it further.

On adjusting the leverage multiplier, Kim said the committee was "not reviewing" that option. Committee Chairman Oh Ki-hyung had told this outlet on Wednesday that the panel was looking at reducing the leverage multiplier on single-stock leveraged and inverse ETFs from two times to 1.5 times or lower.

Oh said Monday he had been briefed on a method by which setting the underlying index calculation base at 0.75 — rather than the standard 1 — would effectively bring a two-times leveraged product down to a 1.5-times level in practice. "We confirmed it is not technically impossible," he said, "but whether to actually introduce it is a separate question that requires comprehensive consideration of market confidence and investor protection."

Kim echoed that position. "Directly adjusting the multiplier itself is not currently under review," he said, explaining that changing the multiplier on existing products would require a unitholder meeting. "The discussion was limited to exploring whether volatility could be reduced through other means, rather than directly lowering the multiplier."

The committee also said the name "ETF" as applied to single-stock leveraged products deserved reconsideration. Lawmaker Lee Gang-il said investing in a single-stock product was in effect no different from investing directly in the underlying share. "It is an entirely different concept from an ETF," he said.

Oh said single-stock leveraged products were more akin to derivatives. "Whether using the term ETF is inappropriate is something society should debate, and if necessary we can pursue a legislative amendment," he said.

The committee drew a line at delisting. Kim said rushing to discuss delisting could instead undermine confidence in the stock market. "The right approach is to reduce the product's risk profile and volatility," he said.

Financial regulators are set to raise the basic deposit requirement for single-stock leveraged ETFs and exchange-traded notes from 10 million won to 30 million won starting Friday.