South Korea Won't Abolish Leveraged Products, Seeks Market Impact Solutions

Kim Yong-beom, policy chief at South Korea's Presidential Office, has ruled out the outright abolition of single-stock leveraged products, citing the potential for immense market disruption. These products, which amplify both gains and losses in specific stocks like Samsung Electronics and SK Hynix, are already deeply embedded in the market with over 10 trillion won invested.

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Abolishing them entirely would cause enormous shock to the market, so that's hard to imagine.

"Abolishing them entirely would cause enormous shock to the market, so that's hard to imagine," Kim stated on a KBS program. He emphasized that the focus should instead be on finding operational methods to mitigate the impact these leveraged products have on market volatility. The current system, where the gap between market price and net asset value is managed roughly every 30 minutes, can lead to concentrated selling pressure in short periods.

This concentrated trading, especially during sharp stock declines, can exacerbate price drops as leveraged bets are unwound. Kim suggested diversifying operational methods to ease this concentration. Options include extending the period for calculating the gap between market price and net asset value, perhaps to two hours, or exploring the use of derivatives instead of trading physical assets to manage the leverage.

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We need to minimize the market shock that single-stock leveraged products have.

The policy chief stressed the need for authorities, asset management firms, and brokerages to collaborate on finding solutions that minimize market shocks. The goal is to refine the management of these products to prevent sudden, large sell-offs that can destabilize the market, while acknowledging the existing investments and investor base.

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Can't we extend that period to about two hours? Do we have to sell physical assets to manage this? Can't we manage it appropriately with other derivatives?