South Korea's ETF curbs may not curb volatility

South Korean financial authorities have announced supplementary measures to address the growing side effects of single-stock leveraged and inverse Exchange Traded Funds (ETFs), particularly those focused on Samsung Electronics and SK Hynix. The Financial Services Commission revealed on June 16 that the new regulations will raise the basic deposit requirement from 10 million won to 30 million won, increase the minimum trading unit from one share to 20 shares, and extend the mandatory investor education period from two to three hours. Notably, existing products will not face trading suspensions or reduced leverage ratios.

These measures aim to curb the market influence of these products by raising the barrier to entry, with authorities estimating a potential one-third reduction in the current 12 trillion won market capitalization. However, the effectiveness of these entry regulations in mitigating extreme investment concentration and market volatility remains questionable. The article criticizes the authorities' initial approval of these products, despite widespread concerns about their potential to fuel market overheating and volatility, labeling it a clear policy failure.

The Financial Services Commission attributed the domestic market's volatility primarily to global semiconductor industry outlooks rather than solely to leveraged products. They cited data showing higher daily returns for other foreign memory chip stocks compared to Samsung and Hynix. However, the article counters that while global semiconductor stocks fluctuate, no single foreign large-cap stock exceeds a 10% market share. In contrast, Samsung Electronics and SK Hynix together constitute over 50% of South Korea's stock market. This concentration, amplified by leveraged products, intensifies market volatility. The article notes that circuit breakers, which halt trading due to sharp index movements, have been triggered seven times this year, with five of those instances occurring after the introduction of leveraged products, impacting even investors not directly involved in these funds.

Concerns are mounting in the market regarding the efficacy of these new measures. Foreign securities firms have issued reports warning of the abnormal amplification of short-term volatility by leveraged products, expressing caution about investing in the South Korean market. This situation is eroding foreign investor confidence and likely exacerbating the anxieties of individual investors. The article urges financial authorities to remember their fundamental duty to control excessive market overheating and volatility, and to foster a stable environment for long-term investment.