Measures to strengthen the basic deposit requirement for single-stock leveraged exchange-traded funds (ETFs), originally scheduled for next month, will be implemented early starting on the 31st of this month. To prevent excessive churn trading, single-stock leveraged products will not recognize securities used as collateral (substitute securities) as basic deposits until they are sold and deposited in cash.
The move is seen as an inevitable rush to curb investment overheating, after two months of extreme volatility since the products launched left the market so damaged that liquidity dried up for most stocks other than Samsung Electronics (005930.KS) and SK hynix (000660.KS), as well as for the KOSDAQ. President Lee Jae-myung had also ordered swift remedial measures for the related products.
Analysts in the securities industry and financial authorities forecast that with investment demand restricted, the products' market capitalization share, which reached about 12 trillion won, could shrink to as little as 10 percent over the long term. The judgment is that "throwing sand faster into a smoothly turning wheel" can slow the pace. The government is also preparing additional measures, including mandating that liquidity providers (LPs) spread out the timing of their rebalancing trades. Still, some continue to argue that fixing the distorted market requires delisting the products altogether, even if it means admitting a policy failure.
The Financial Services Commission (FSC) said on the 24th that, to stabilize the domestic stock market as soon as possible, it would move up measures such as raising the basic deposit from August to the 31st of this month. Earlier, the FSC had announced it would raise the basic deposit from the existing 10 million won to "30 million won in cash" and stop recognizing substitute securities as deposits, effective August 5 and August 19, respectively.
The timing for recognizing the cash basic deposit has also been tightened. Going forward, even if substitute securities are sold, they will not be recognized as a basic deposit until deposited in cash (T+2). The rationale is to minimize extreme turnover by restricting same-day selling and buying. Amounts borrowed against sale proceeds as collateral are also excluded from the basic deposit. "I have never heard of the concept of having to put down a deposit to buy stocks, like jeonse (a Korean lease system requiring a large lump-sum deposit instead of monthly rent)," said Lee Kyung-jun, head of the ETF management division at Kiwoom Asset Management. "The non-recognition of substitute securities will have the biggest impact." For ordinary investors, having to tie up 30 million won in cash to buy leveraged ETFs is inevitably burdensome.
The market expects that raising the barriers to entry more quickly will reduce additional inflows. "It will become difficult to average down, so retail investors' net buying is likely to fall away sharply," an asset management official said. In fact, after the first round of remedial measures came out on the 16th of this month, trading volume in single-stock leveraged products declined slightly amid falling share prices of Samsung Electronics and SK hynix. Comparing the trading value of the KODEX and TIGER Samsung Electronics leveraged ETFs and the KODEX and TIGER SK hynix leveraged ETFs over the four trading days including the day the financial authorities announced the remedial measures (July 13–16) with the first four trading days after the announcement (July 20–23), the combined average daily trading value of the four ETFs fell 20.5 percent from 9.3739 trillion won to 7.4499 trillion won. Over the same period, the combined average daily trading volume also fell 13.1 percent from 622.09 million shares to 540.39 million shares.
In particular, the move to bar immediate repurchase of securities after selling on the same day is interpreted as directly helping to lower turnover rates that exceed 100 percent. The financial authorities are known to have analyzed that the measures will reduce the products' market cap to as little as 10 percent—a larger scale than the original expectation of one-third of market cap. The idea is that as investor funds withdraw and market cap declines, rebalancing volume will also fall, reducing volatility.
On the other hand, opinions are divided over whether the measures go beyond temporarily suppressing demand to provide a structural solution. "You can't say there's no effect at all, but the effect of calming the overheating doesn't seem that large," said an ETF division head at another asset manager. "The message is the broad direction of telling investors, as much as possible, not to invest in single-stock leverage." Another securities industry official explained, "Since the government cannot admit a policy failure, early implementation is the best option it could choose."
For this reason, some in the industry, along with experts and individual investors, are voicing the view that delisting is the answer. They argue that the industry should naturally liquidate the products from the market while covering part of investors' losses.
