Securities Industry Expresses "Market Contraction Concerns" Over ETP High-Intensity Measures

Concerns in the Industry Over Repetition of the 'ELW Incident' Amid Financial Authorities' Review of Basic Deposit Requirements

[Asia Economy Reporter Minji Lee] As financial authorities are reportedly considering regulations requiring basic deposits for Exchange Traded Notes (ETNs) and Exchange Traded Funds (ETFs), the securities industry is feeling greatly unsettled. If the deposit system is introduced as a market stabilization measure beyond the initially expected level of preliminary education, concerns are rising that the stock warrant securities (ELW) incident could be repeated, potentially causing the market to collapse.

According to the Financial Services Commission and the Financial Supervisory Service on the 11th, the 'ETP (ETNㆍETF) Stabilization Plan' is expected to be announced as early as this week. The financial authorities are taking this step to calm the overheated market atmosphere and minimize individual investors' losses. A Financial Services Commission official explained, "Regarding deposits, we are working with the Korea Exchange to determine the scope, such as leverage and inverse products."

As oil prices continue to fall, losses for individual investors in West Texas Intermediate (WTI)-linked crude oil leverage ETNs and crude oil ETFs have become uncontrollable. In particular, despite the financial authorities' recommendation to refrain from investing in ETNs, purchases have not decreased, causing the divergence rate between the actual indicator value (IV) and market price to soar up to 1000%, preventing products from trading at their fair value.

The follow-up measures currently under review by the financial authorities include a preliminary education system and a basic deposit system. The preliminary education system aims to prevent investors who do not fully understand the actual product structure from entering the market, and securities firms issuing ETNs share the authorities' view on this.

However, if the deposit system includes not only crude oil leverage and inverse products but also structured products such as straddle ETNs, the market is expected to shrink significantly. Currently, products subject to deposits include futures and options (10 million KRW), and ELWs (15 million KRW).

An official from an ETN issuing company stated, "ETN products allow individuals to engage in investments previously conducted by institutions with small amounts," adding, "If the follow-up measures recreate a situation like ELWs, it will inevitably become a burden from the issuer's perspective." In 2010, ELWs circulated 45 trillion KRW, but after deposit regulations and LP bid range restrictions were introduced to address the issue of ultra-short-term trading (scalping), funds dropped to the 2 trillion KRW level within two years of regulation.

There are also opinions that drastic measures are necessary due to market distortions. Although it may be fatal to securities firms and asset managers in the short term, strong measures by the authorities are needed to curb irrational investments. A representative from a major asset management company's ETF division pointed out, "Leverage and inverse trading accounting for more than 70% of total KOSPI trading means the market is extremely risky," adding, "No country, including the United States, is experiencing a situation where money is pouring into leverage and inverse leverage (inverse leverage) products."

Meanwhile, as a short-term measure, financial authorities are reportedly pushing for securities consolidation (par value consolidation) and have begun working with the Korea Securities Depository and KOSCOM to establish systems. Four types of crude oil leverage ETNs (Shinhan WTI Leverage Crude Oil ETN, QV WTI Leverage Crude Oil ETN, Samsung WTI Leverage Crude Oil ETN, Mirae Asset Leverage Crude Oil Mixed) will resume trading through single-price auctions on the 12th, and if the divergence rate based on the closing price does not decrease, trading will be suspended for three trading days as per the existing policy.

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