South Korea Considers Additional Measures for Leveraged ETFs Amid Volatility

South Korea's Financial Services Commission (FSC) is preparing to implement further measures to regulate single-stock leveraged exchange-traded funds (ETFs), signaling a proactive approach to managing market volatility. FSC Chairman Lee Bok-hyun announced that additional steps are being considered beyond the recently disclosed supplementary measures, which are set to take effect on July 31.

During a meeting with executives from major securities and asset management firms in Seoul, Lee indicated that the FSC would first assess the impact of the enhanced basic deposit requirements. However, he stressed that "additional measures will be reviewed and prepared in advance in case demand does not sufficiently subside."

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Additional measures will be reviewed and prepared in advance in case demand does not sufficiently subside.

One potential measure discussed was the introduction of an aggregate management system, which would limit the proportion of single-stock leveraged ETFs within an individual investor's total investment portfolio to under 20%. This, along with raising the threshold for the basic deposit requirement, aims to control demand by increasing the entry barrier for investors.

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Single-stock leveraged ETFs' rebalancing concentrated just before the market close can amplify market volatility.

Lee also urged asset management companies to diversify the timing of their rebalancing activities for single-stock leveraged ETFs. He noted concerns that concentrated rebalancing, particularly just before the market close, can amplify market volatility. The FSC chairman emphasized the commission's responsibility as the ultimate overseer of the financial markets, acknowledging the impact of recent market fluctuations on investor confidence.

The FSC previously announced supplementary measures on July 16, focusing on strengthening the investment requirements for basic deposits. The commission's swift action underscores its commitment to stabilizing the capital markets and safeguarding investors amid increasing market uncertainties.

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The FSC, as the ultimate responsible party for the financial markets, takes very seriously the fact that investor expectations in our capital markets are being shaken due to recent market volatility.