Introduction of Deposit Requirement for Leverage ETFs and ETNs Starting September

Financial Authorities Announce Measures to Stabilize ETF and ETN Markets

[Asia Economy Reporter Eunmo Koo] Financial authorities will introduce a basic deposit system for leveraged Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs) starting this September to curb speculative demand from investors who engage in copy trading without sufficient prior knowledge.

On the 17th, the Financial Services Commission announced the "ETF·ETN Market Stabilization Plan" aimed at suppressing excessive speculative demand recently occurring in the ETF and ETN markets, alleviating the concentration on specific products, and fostering ETFs and ETNs as sound asset management markets.

◆ Suppressing Excessive Speculative Demand... Applying a Basic Deposit of 10 Million KRW for Individual Investors

First, to suppress excessive speculative demand, financial authorities decided to apply a basic deposit of 10 million KRW to individual investors intending to purchase leveraged ETFs and ETNs, thereby restricting margin trading. Leveraged ETFs and ETNs will be excluded from credit transactions, and a 100% margin deposit will be mandatory. However, they stated that a phased implementation with a grace period for existing investors is under consideration.

Additionally, leveraged ETFs and ETNs, which involve derivative investments, will be managed separately from the general stock market as a distinct market. Products will be classified according to the risk inherent in the derivatives embedded in ETFs and ETNs, and differentiated listing reviews and investor entry regulations will be introduced as investor protection measures based on the inherent risk characteristics.

Kim Jeonggak, Capital Market Policy Officer at the Financial Services Commission, explained, "Overheating of the leveraged ETF and ETN markets is also a concern in the United States. Large asset managers like BlackRock have sent letters to exchanges such as Nasdaq emphasizing the need for differentiated management based on product risk levels. Our financial authorities also recognize the necessity to establish separate market classifications or frameworks according to risk levels."

Furthermore, individual investors wishing to invest in leveraged ETFs and ETNs will be required to complete prior online education, and to mitigate speculative demand caused by ETNs falling to low-priced stocks when the indicative value declines, a reverse stock split of ETNs will be permitted.

◆ Enhancing Efficiency in Managing Premium/Discount Rates... Strengthening Market Management Criteria to 6% for Domestic and 12% for Overseas Underlying Assets

Measures to improve the efficiency of managing premium/discount rates will also be implemented. The criteria for market management targets will be tightened from the current premium/discount rate of 30% or more to 6% for domestic underlying assets and 12% for overseas underlying assets to promptly curb the expansion of premium/discount rates. When designating investment caution stocks, the trading method will be changed to single-price trading, and if normalization of the premium/discount rate is difficult, trading will be suspended.

Moreover, to prevent the expansion of premium/discount rates, issuers will be obligated to secure a certain proportion of liquidity supply volume relative to the total number of listed securities to ensure smooth ETN supply. The evaluation period for liquidity providers will be shortened from quarterly to monthly, and penalties for violations will be strengthened to encourage active management of premium/discount rates.

In cases where rapid fluctuations in indicative value are expected to cause a sharp expansion of premium/discount rates and investor protection is necessary, issuers will be allowed to liquidate ETNs early on a limited basis. Policy Officer Kim stated, "Currently, there is no mention of this in laws and regulations, making early liquidation of ETNs impossible. We plan to enable early liquidation through future amendments to regulations and securities registration statements."

Additionally, in cases where market conditions change rapidly and prompt action is required, exceptions will be made to investor protection regulations applied to ETNs, such as shortening the effective date of securities registration statements, to ensure timely supply of new products.

◆ Creating an Environment for Diverse ETN Launches... Allowing ETN Launches for Domestic Representative Indices like KRX300

Financial authorities also plan to foster an environment where various ETNs can be launched in the future. To this end, they will allow ETN launches for domestic market representative indices such as KOSDAQ150 and KRX300, which were previously restricted to prevent overheating competition with ETFs.

They will relax the composition requirements for underlying indices to enable product development that can substitute for direct overseas stock investments by investors. Furthermore, they plan to permit the calculation of proprietary indices, provided transparency and appropriateness are ensured, allowing securities firms to list products linked to indices they develop themselves.

For existing products with very low trading volume or difficult liquidity management, voluntary delisting will be allowed after a certain period post-listing to reduce the burden of launching new products.

Financial authorities stated that improvements achievable solely through amendments to exchange regulations will be implemented from July after market consultations, while tasks requiring amendments to capital market laws and development of IT systems will be implemented from September.

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