Speculative Oil ETNs, Financial Authorities Tied Hands

Crude Oil Leverage ETN Warning Reissued
Shinhan and Mirae Trading to Resume Next Week

No Domestic Merger System, Minimum 3 Months
Delisting Concerns if Indicator Value Hits Zero

[Asia Economy Reporter Minji Lee] Financial authorities have issued a second warning regarding overheated investment in crude oil Exchange-Traded Notes (ETNs). This is because abnormal trading by individual investors has not subsided despite requests to refrain from investing. While there are opinions in the market that special measures are needed for the crude oil market, which has turned into a speculative arena, there are criticisms that financial authorities have no sharp cards left to play.

◆ ETN trading to resume next week = According to the Korea Exchange on the 24th, trading of 'Shinhan Leverage WTI Crude Oil Futures' and 'Mirae Asset Leverage Crude Oil Futures Mixed ETN' will resume on the 27th with a transition to single-price trading. The 'Samsung Leverage WTI Crude Oil Futures ETN,' which was scheduled to resume trading due to additional liquidity provider (LP) supply, has no set resumption date as no additional listings have been made.

The financial authorities issued a consumer alert at the highest level, 'Risk,' again after two weeks. This was based on the judgment that the possibility of losses in crude oil futures-linked products has greatly increased due to rapid changes in the crude oil market. Currently, the financial authorities and the exchange have exhausted all possible measures to release to the market. They have switched leverage ETN trading to single-price trading and implemented a measure to suspend trading if the trading price deviates by more than 30% from the appropriate value for five or more trading days.

However, this did not significantly affect investor sentiment. The price of Shinhan Leverage WTI ETN fell 70.5% from 2,355 won on the 9th to 695 won on the 22nd, and the premium rate widened from 63.9% to 1,044.0%. During this period, LPs listed about 1 trillion won worth of shares based on the issue price to reduce the premium rate, but as crude oil prices fell, the premium rate widened uncontrollably.

◆ Ultimately, is delisting the only option? = Some suggest that a reverse stock split should be conducted to raise the ETN price, which has fallen to penny stock levels. If a reverse stock split is implemented, irrational investment in seriously undervalued ETN products could be limited.

Even this is not easy. There are no regulations or systems for reverse stock splits domestically, and the system is not established, requiring at least three months or more. A Korea Exchange official explained, "To process splits and reverse splits of derivative-linked securities, a securities system is needed, so immediate implementation is difficult. However, we are currently in the review stage to establish related regulations."

There are also concerns in the market that if the indicative value falls to zero, delisting may occur. This is because if the indicative value (IV) falls to zero due to increased oil price volatility, investors will inevitably lose their entire investment. The indicative value is determined by multiplying the index volatility rate by the previous day's IV. If the indicative value hits zero, even if the crude oil futures index rises, the indicative value of the product will remain at zero. A Korea Exchange official said, "There is no reason to keep securities with an indicative value of zero listed on the exchange. If the issuer requests delisting, we will take appropriate measures."

◆ Revealed gaps in the derivatives market = Currently, investors are criticizing securities firms in the ETN market for profiting from individual investors' money. For example, if a securities firm sells an ETN with an IV of 10 won at 100 won due to the premium rate, it gains 90 won per share. However, since the premium rate in the ETN market is caused by individual-to-individual trading beyond the LP's management scope, it is pointed out that the market's loopholes should be examined. An industry insider said, "The domestic ETN market is small, making it difficult to give issuers much authority, but it seems that there was a failure to prepare countermeasures for the overheated market."

In the U.S., issuers are required to include conditions for early liquidation in the prospectus. Early liquidations of the 'VelocityShares 3x Long Crude Oil ETN' and 'ProShares Daily 3x Long Crude ETN,' which seek triple the return of the S&P GSCI Crude Oil Index rise earlier this month, are examples of this. A Korea Exchange official explained, "Unlike overseas markets, there are no regulations on issuer authority over products, so there was no mechanism to enforce early redemption."

This content was produced with the assistance of AI translation services.