FSS Warns "Samsung Electronics 2x Leveraged ETF Will Intensify Investor Concentration"

"Individual Investors Show Clear Preference for Leveraged and Inverse Products"

"Measures Will Be Prepared After Analyzing Trading Patterns Post-Product Launch"

"No Liquidity Issues Yet for Commercial Papers and IMAs"

The Financial Supervisory Service (FSS) has expressed concerns about potential investor concentration in domestic single-stock leveraged and inverse Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs), which are set to launch on May 22. The FSS warned that the growing influx of individual investors into inverse ETFs and similar products could increase the risk of losses.

Investor Concentration Expected with Launch of Samsung Electronics Leveraged ETF on the 22nd

Hwang Sun-oh, Deputy Governor for Capital Markets and Accounting at the FSS, stated during a briefing on current capital market issues held at the FSS headquarters in Yeouido, Seoul, on the morning of May 11, "With clear signs of investor trading concentration in leveraged and inverse ETFs, the introduction of domestic single-stock leveraged ETFs may attract even more investors, further increasing market volatility."

Individual investors have shown a pronounced preference for leveraged and inverse products. Hwang explained, "As of last month, the average daily turnover rates for KOSDAQ and KOSPI, where individual investors account for a large proportion, were already high compared to major overseas markets, at 1.48% and 2.56%, respectively. In particular, for ETFs that track double the decline of stock indices, the daily turnover rate sometimes reached as high as 70% as investors sought short-term gains." He added, "Such trading patterns can amplify market volatility and erode investor returns, so investors should carefully consider the potential risks of losses before investing."

There are also concerns about credit financing risks, often referred to as 'Bittou' (investing with borrowed money). Hwang noted, "As of last month, credit loans accounted for 0.58 of market capitalization, which is manageable, but the outstanding balance of credit loans surged from 27.3 trillion won last year to 35.7 trillion won at the end of last month." He warned, "Credit loans not only incur interest costs but also increase investor losses in the event of forced selling when stock prices fall."

The FSS is undertaking comprehensive risk management efforts. Hwang said, "Prior to the launch of domestic single-stock leveraged ETFs, we are providing investor education on these products. After launch, we will analyze trading patterns and devise response strategies." He added, "Furthermore, we are monitoring credit loan trends and risk levels by securities firm, and, together with relevant agencies, will discuss institutional reforms to foster a culture of long-term investment based on corporate value, rather than short-term speculative trading, in the stock market."

"Fragmentary Disclosures Will Be Corrected," Strengthening Disclosure Review

The FSS has also strengthened disclosure reviews. Hwang stated, "Even after the amendment of the Commercial Act, there have been formalistic disclosures, and we have actively responded with correction orders to the companies concerned." He continued, "We are guiding companies to understand the purpose of the amended Commercial Act and fulfill their obligations to shareholders." Under the revised law, companies are required to establish a special committee for shareholder communication and disclose its activities, but many have only made minimal disclosures about holding such meetings.

The FSS also demanded amendments to Hanwha Solutions' rights offering plan. Hwang said, "If essential information for investor decision-making is not properly included in the securities registration statement, we have no choice but to request corrections." Regarding Hanwha Solutions, he pointed out, "The registration lacked sufficient details on the nature of liquidity risks mentioned, whether there were no other means of raising funds besides the rights offering, and the concrete basis for the company's earnings outlook."

Regarding the task force (TF) established to improve bio-disclosures after the Samchundang Pharm incident, Hwang announced that guidelines will be released next month. The key points of the guidelines are ensuring disclosures are understandable to general investors and do not contradict the companies’ press releases.

Fewer Risk Factors in Issuance Notes and IMA

The FSS is also monitoring risks for comprehensive financial investment business entities. Hwang explained, "With the expansion of issuance notes and Investment Management Accounts (IMAs), issuance notes carry the risk of maturity mismatch since their funding maturity is under a year, and IMAs pose concerns about the soundness of assets held by securities firms due to principal protection obligations." He added, "We are advancing risk management frameworks by requiring securities firms to analyze crisis scenarios and establish funding plans."

Yonhap News

However, Hwang noted, "Currently, liquidity related to issuance notes and IMAs remains at a stable level." He explained, "As of the end of March, the liquidity ratio of seven securities firms was 115%, and the liquidity ratio for issuance notes alone was about 163%, so there is no immediate cause for concern."

Hwang also refrained from commenting in detail regarding Mirae Asset Securities’ public offering process with SpaceX. He said, "It seems Mirae Asset Securities has yet to decide on the allocation method for domestic investors, so it is difficult to be specific." He added, "Promoting the offering before details are finalized could potentially violate regulations, so we have requested that Mirae Asset Securities refrain from related publicity."

As for the postponement of the MBK Partners sanction review, Hwang clarified, "The delay is due to the review agenda and not because MBK is free of issues." Last year, financial authorities issued a preliminary notice of severe sanctions, including business suspension, to MBK, the largest shareholder, following various controversies beginning with Homeplus's surprise application for court receivership. Since the first sanction review in December last year failed to reach a conclusion, the review has continued to be postponed.

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