Retail investors must complete 5-day mock trading before buying single-stock leverage ETFs starting Wednesday

Starting Wednesday, retail investors who want to trade single-stock leverage exchange-traded funds (ETFs) or exchange-traded notes (ETNs) — whether listed domestically or abroad — for the first time will be required to complete a mock trading course.

According to the Korea Exchange on Tuesday, the mandatory mock trading requirement will apply to general retail investors making their first trades in single-stock leverage or inverse ETFs and ETNs. Professional investors, corporations and foreign investors are exempt.

The requirement applies equally to single-stock leverage products listed on overseas exchanges, not just domestic ones.

New investors must complete at least five trading days of mock trading through the Korea Exchange's mock trading website, logging a minimum of one hour per trading day for a total of at least five hours before they can trade the actual products.

Investors who have previously traded single-stock leverage products are not subject to the mock trading requirement. Retail investors who traded domestic or overseas single-stock leverage products between May 27 and Tuesday are exempt from the course.

As a result, starting Wednesday, retail investors with no prior trading experience in these products who have not completed the mock trading course will be barred from making new purchases of domestic single-stock leverage ETFs and ETNs.

The Korea Exchange's mock trading completion system will go live Wednesday. After the five-trading-day course period, completion can be confirmed from Aug. 24. An additional one to two business days may be needed after registering completion records with a brokerage and receiving administrator approval.

The mandatory mock trading requirement is part of a package of additional regulations on single-stock leverage products that the government announced at a market conditions review meeting — known as the F4 meeting — on July 29.

At the time, financial authorities put forward four measures: setting per-account investment limits on single-stock leverage products (such as capping them at 20 percent of total invested assets), strengthening transaction cost burdens including excess asking price surcharges, making pre-investment mock trading mandatory, and introducing emergency market stabilization measures. Of these, the mandatory pre-investment mock trading requirement is the first to take effect, starting Wednesday.

Currently, retail investors who wish to participate in the listed derivatives market must complete both a pre-education course and a mock trading program. The government plans to apply the same regime to single-stock leverage products. The Financial Services Commission said at the time that it would "make mock trading mandatory so that investors trading single-stock leverage products can clearly understand the risks of the products before investing."

The minimum deposit requirement for single-stock leverage products was also tightened starting July 31. The basic deposit was raised from 10 million won ($7,040) to 30 million won in cash, and substitute securities were no longer accepted, raising the barrier to entry for investors.

Since the regulations took effect, the size of the single-stock leverage product market has shrunk rapidly, though not yet to the level the government had projected. According to the Korea Exchange, the combined market capitalization of the 16 single-stock leverage and inverse ETFs listed on the domestic market stood at 5.61 trillion won as of Monday.

Financial authorities had projected that the tightened deposit requirement would reduce the market cap of related products to the 4 trillion to 5 trillion won range. Byeon Je-ho, director general of the Financial Services Commission's capital markets bureau, said at a briefing on leverage ETF supplementary measures held at Government Complex Seoul on July 16 that simulations of the effect of the 30 million won cash deposit requirement suggested the market cap, then at around 12 trillion won, would fall to the 4 trillion to 5 trillion won range.

That would be roughly in line with the 4.4 trillion won market capitalization when single-stock leverage products were first listed on May 27. Byeon said the initial figure that asset managers had projected was 4.4 trillion won, adding that the goal was essentially to bring the market back to that level.