Financial authorities push for 'emergency market intervention' powers, considering flexible leverage ratio adjustments

South Korea's Financial Services Commission (FSC) is pushing to introduce an emergency authority to combat stock market volatility, with a particular focus on single-stock leveraged Exchange Traded Funds (ETFs). The core of the plan involves amending the Capital Markets Act to grant the FSC the power to swiftly implement stabilization measures, such as directly lowering leverage ratios or restricting trading, when market volatility escalates rapidly.

“

Reducing the leverage ratio would have an effect in terms of mitigating volatility.

Currently, altering the leverage ratio requires the consent of at least a quarter of unit holders through a general meeting, a process deemed too slow for effective intervention. The FSC is looking at models like Hong Kong's Securities and Futures Commission (SFC), which introduced a "variable leverage ratio" allowing daily adjustments within a 2x range. FSC Chairman Lee Bok-hyun noted that reducing leverage ratios could help mitigate volatility, and the specifics of considering unit holders' interests will be addressed during the legislative process.

Potential additional measures under consideration include personal investment limits, mandatory mock trading, further increases to the basic deposit requirement, and trading suspensions. The FSC is exploring limiting the proportion of single-stock leveraged ETFs in individual accounts to around 20%. While the amendment process will take time, the FSC is also monitoring the effects of existing measures, such as the recent increase in the basic deposit requirement from 10 million to 30 million won, which reportedly reduced leveraged ETF trading volume significantly.

“

It is not normal for the KOSPI to plummet 16.17% in just two days, nor is it normal for it to surge 17.91% in a single day.

Amidst the turmoil surrounding leveraged ETFs, the Korea Exchange has informed asset managers that processing new general ETF listings will be difficult starting this month. This effectively restricts new ETF applications, potentially delaying subsequent reviews by the Financial Supervisory Service and the listing schedule. Meanwhile, a ruling party official has proposed a parliamentary investigation into the stock market's recent extreme fluctuations, criticizing the market's instability as akin to a "casino gambling floor."

“

The situation in the stock market has become like a casino gambling floor.