FSC chief warns of tighter rules on single-stock leveraged ETFs if demand stays hot

The government said Tuesday it is preparing additional regulations on single-stock leveraged products — including individual investment caps — should demand fail to cool sufficiently. Authorities plan to assess the impact of recently tightened deposit requirements before deciding on any follow-up action.

FSC Chairman Lee Eok-won convened a financial investment industry forum at the Korea Financial Investment Association in Yeouido, Seoul, and said the FSC would "closely monitor the policy effects of the enhanced basic deposit requirement and other supplementary measures taking effect Friday, while proactively reviewing and preparing additional steps — such as raising investment requirements further and setting individual investment limits — in case demand does not subside enough."

The forum brought together the Korea Financial Investment Association chief, executives from major securities firms and asset managers, and officials from related institutions to discuss supplementary measures for single-stock leveraged products.

Lee said the supplementary package "focused on strengthening investor protection and stabilizing product demand, taking into account the nature of these products, whose market impact grows with investment demand."

Under the supplementary measures announced July 16, the FSC suspended new listings and advertising for single-stock leveraged products and raised the basic deposit requirement for purchasing them to at least 30 million won ($20,500) in cash, with no substitute securities accepted. The measures, originally scheduled for August, were brought forward to Friday.

An expansion of the minimum trading unit is also being fast-tracked. Lee said the FSC is "in discussions to implement the minimum trading unit expansion ahead of the original schedule." The minimum unit will increase from one share to 20 shares.

In addition, the FSC plans to strengthen the assessment component of the mandatory pre-investment education for single-stock leveraged products and add one hour of case-based instruction. Enhanced ETF price-deviation management will take effect Aug. 19.

If demand remains elevated even after the supplementary measures take effect, authorities said they will consider further regulations. Options under review include periodic re-education requirements, a prerequisite of prior investment experience, and aggregate exposure limits capping a single investor's total holdings in financial investment products at a set percentage.

The government also called on the industry to play an active role in stabilizing the market. Lee told asset managers that "there are concerns that rebalancing concentrated just before market close amplifies volatility further, so we ask that you spread out rebalancing timing."

He also urged securities firms acting as liquidity providers to manage liquidity more carefully. "The market's assessment is that trading volumes have become excessively large for single-stock leveraged products, with as many as 20 or more liquidity providers per stock, rising inter-LP transactions, and expanding arbitrage activity," Lee said. "This is a critical moment for the industry, with its expertise, to make its own efforts to appropriately manage liquidity and stabilize the market."

Securities firms and asset managers said they would review and pursue voluntary industry measures on spreading rebalancing timing and ensuring appropriate liquidity supply.

Lee said the FSC "takes seriously the fact that investor confidence in our capital markets is wavering," adding that it would "swiftly advance the supplementary measures related to single-stock leveraged products, with financial market stability and investor protection as our top priorities, so that market confidence can be restored as soon as possible."