South Korea's Ministry of Economy and Finance and Financial Services Commission announced on the 16th that they will raise the basic deposit requirement for purchasing single-stock leveraged ETFs from 10 million won to 30 million won starting next month 5th. From next month 19th, investors must hold 30 million won in cash in their accounts to buy single-stock leveraged products. The regulatory tightening comes 50 days after the country's first single-stock leveraged ETFs launched, as excessive investment concentration increased volatility across the entire stock market. The two-stage implementation aims to reduce the current 12 trillion won market capitalization of single-stock leveraged products to approximately 4-5 trillion won.
Financial Regulators Implement Cash-Only Deposit Rule
Under current rules, securities firms recognize 70% of the market value of stocks, ETFs, and bonds as eligible deposits. An investor holding 15 million won worth of stocks or ETFs in their account receives credit for 10.5 million won in deposits. Starting next month 19th, this recognition will be eliminated, requiring investors to prepare 30 million won or more in cash. The new requirement applies not only to new investors but also to existing single-stock leveraged ETF holders making additional purchases. No restrictions apply when selling. Securities firms will be prohibited from relaxing deposit standards for preferred customers. The rules also apply to single-stock leveraged products listed overseas.
Byun Je-ho, Director of the Capital Markets Bureau at the Financial Services Commission, stated that "the primary goal is to first reduce the scale." Financial authorities estimate the measure will shrink the single-stock leveraged ETF market capitalization from the current 12 trillion won to approximately 4-5 trillion won, a reduction of about one-third.
Trading Unit Increases to 20 Shares Starting November
Starting in November, investors will be required to trade in units of 20 shares instead of the current 1 share. As of the 15th, the Samsung Electronics single-stock leveraged ETF price stands at 5.6% of Samsung Electronics' share price, while the SK Hynix single-stock leveraged ETF price is at 1% of SK Hynix's share price. When the trading unit increases to 20 shares, these percentages will rise to 112% and 20% respectively. Securities firms will directly purchase remaining shares from investors holding fewer than 20 shares. The mandatory pre-trading education will be extended from the current 1 hour of basic training and 1 hour of advanced training to 1 hour of basic training and 2 hours of advanced training.
Market Cap Grew 170% Since May 27 Launch
Single-stock leveraged products rapidly expanded in market capitalization and trading volume over a short period, increasing volatility in the domestic stock market. The 16 single-stock leveraged products listed on May 27 with a market cap of 4.4 trillion won grew to 11.9 trillion won as of the 15th, a 170% increase. High volatility led to frequent turnover. The products launched after Samsung Electronics and SK Hynix's weight in the KOSPI grew significantly. At the end of last year, the two companies' market cap accounted for 34% of the KOSPI's total market cap, but by May 26 when single-stock leveraged products listed, this had expanded to 49%.
Delisting and Leverage Ratio Reduction Excluded from Measures
Delisting and lowering leverage ratios, suggested by some observers, were excluded from this regulatory package. Financial authorities determined that these products do not meet delisting requirements when considering factors such as total assets and turnover rates. Authorities also anticipated that reducing the leverage ratio from 2x to 1.5x could cause investment demand to shift to overseas products instead.
Shin Se-don, Professor Emeritus of Economics at Sookmyung Women's University, stated that "the consensus is that raising deposit requirements and education will not curb demand," adding that "methods that reduce investment attractiveness, such as lowering leverage ratios and then gradually restoring them in stages, would be effective."
FAQ
What deposit changes did South Korean regulators announce for single-stock leveraged ETFs?
South Korea's Ministry of Economy and Finance and Financial Services Commission announced on the 16th that the basic deposit requirement will increase from 10 million won to 30 million won starting next month 5th, with a cash-only requirement of 30 million won taking effect next month 19th.
How much is the single-stock leveraged ETF market expected to shrink?
Financial authorities estimate the current 12 trillion won market capitalization of single-stock leveraged products will shrink to approximately 4-5 trillion won, a reduction of about one-third.
When will the trading unit requirement change for single-stock leveraged ETFs?
Starting in November, investors will be required to trade single-stock leveraged ETFs in units of 20 shares instead of the current 1 share minimum.
