FSC Chief Says Single-Stock Leveraged ETFs Are Amplifying Volatility, Vows Further Action

Kim Byoung-hwan, chairman of South Korea’s Financial Services Commission, said on July 29 that authorities view the surge in market volatility tied to single-stock leveraged exchange-traded funds with grave concern.

Kim made the remarks during a policy report session of the National Assembly’s Political Affairs Committee, responding to a question from People Power Party lawmaker Park Dae-chul. Park asked whether Kim agreed with the assessment that the plunge in single-stock leveraged products was a man-made problem originating with the Financial Services Commission and the Financial Supervisory Service.

Kim said authorities take the sharp increase in market volatility very seriously. As the officials ultimately responsible for the financial market, they also bear heavy responsibility, he said.

He added that the government would move quickly on follow-up measures and take additional steps aggressively if needed.

Lawmakers on the committee proposed raising additional deposit requirements and adjusting leverage ratios for single-stock leveraged products. They also suggested limiting new purchases to professional investors.

Kim said those measures would be reviewed.

Requiring a cash deposit of 30 million won ($21,700) could cut daily trading volume by 60%, Kim said. He added that authorities would consider raising the deposit further or pursuing other options if market conditions require it.

Democratic Party lawmaker Kim Hyun-jung asked whether there was a need to introduce a variable leverage structure that would allow leverage ratios to be adjusted.

Adjusting leverage ratios appears likely to help ease volatility, Kim said. He added that the government would examine in the legislative revision process how to address issues such as meetings of beneficiary investors.

Kim also mentioned a possible cap on investment size. One option would be to set a limit on only a portion of an investor’s total funds, allowing partial investment while reducing the overall scale, he said.

Financial authorities are also reviewing ways to stagger rebalancing times and reduce trading volume.

Lee Bok-hyun, governor of the Financial Supervisory Service, also said authorities are treating the single-stock leverage issue with gravity.

He said they would make every effort to minimize volatility.

Lee also explained remarks he made at a press briefing last month that the product should have been blocked "even if it meant lying down in protest." He said the comment was intended to protect investors at a time when volatility was emerging in the underlying shares and carried no other meaning.

Han Kyung-woo, Hankyung.com reporter case@hankyung.com