South Korea mandates mock trading for leveraged investments

South Korea is implementing a new rule requiring investors to undergo five days of mock trading before they can invest in single-stock leveraged products, including inverse funds. The measure, set to take effect on November 19, is designed to ensure potential investors fully grasp the inherent risks of these complex financial instruments. The Financial Services Commission greenlit the change during its first extraordinary standing meeting, expanding the existing mock trading obligation that previously applied to futures, options, and short-selling. Under the new regulation, investors must complete at least five business days of mock trading, totaling over five hours, before engaging with single-stock leveraged products. The Korea Exchange plans to offer a free mock trading service, simulating real market conditions, on its website starting November 19. This platform will allow investors to practice trading with virtual funds at current market prices. Authorities hope this will help investors understand risks like the "negative compounding effect," where returns can lag behind the underlying index during sideways market movements.

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The measure is intended to ensure that prospective investors can sufficiently understand the risks of leveraged products in advance.