The South Korean brokerage industry has reportedly agreed to tighten investor protection rules for single-stock leveraged exchange-traded funds, following criticism that such products tracking Samsung Electronics and SK Hynix have exacerbated volatility in the stock market.
Brokerages agreed in principle to raise the minimum deposit requirement to limit excessive leverage by retail investors in an emergency meeting convened by the regulator, Korean media reported.
One proposed plan is to significantly increase the threshold from the current 10 million won to 50 million won (from HK$53,000 to HK$260,000), the report said.
The industry also agreed to provide more targeted risk warnings in the future based on an investor's age and portfolio, the report said, adding that it will also expand investor education to help investors better understand the structure and risks of these products.
The 2x leveraged ETFs for AI memory chipmakers Samsung Electronics and SK Hynix were listed on May 27 with the original intention of attracting local investors back from overseas markets.
However, strong retail demand has instead triggered market concerns that these products are amplifying the volatility of the Korea Composite Stock Price Index (KOSPI).
It is estimated that these ETFs have generated a daily rebalancing trade volume ranging from 700 billion to 2.1 trillion won since the listing in May, the report said.
Similar products are available in Hong Kong and, like in South Korea, are also popular among retail investors.
CSOP SK Hynix Daily (2x) Leveraged Product (7709), which aims to deliver twice the daily performance of SK Hynix, posted a staggering return of over 2,000 percent from January to June 22.
That helped the ETF briefly surpass the Tracker Fund of Hong Kong (2800) to become the largest ETF in the city last month.
Still, these products are of high risk and are not designed to be held for more than one day, as returns may deviate from underlying assets due to daily portfolio rebalancing.
In less than a month since its peak, the CSOP SK Hynix Daily (2x) Leveraged Product has plunged more than 61 percent, shrinking the year-to-date gain to over 800 percent.
Despite the proposed tightening rules, KOSPI rose over 6 percent on Wednesday, the biggest daily gain in five weeks, fueled by an 8.8 percent rise by SK Hynix and a 6.3 percent gain in Samsung Electronics.
