Ahead of Launch of 2x Leveraged ETF for Samsung Electronics... FSC Warns "Losses Can Exceed Those of Standard Products"

"Be Cautious of the Negative Compounding Effect and Premium Discrepancy"


Regulations on Trading by Executives of Listed Companies and Financial Investment Firms

The financial authorities have issued a warning about the investment risks associated with upcoming leveraged and inverse Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs) based on single domestic stocks such as Samsung Electronics.

The Financial Services Commission announced on May 15 investor advisories regarding leveraged and inverse products based on single domestic stocks.

Leveraged and inverse products based on single domestic stocks are set to launch on May 27 to address asymmetrical regulations between domestic and overseas markets. This move follows concerns about growing demand for various ETFs shifting to overseas markets. Previously, domestic securities firms and asset management companies were unable to create leveraged and inverse products based on single domestic stocks due to diversification requirements for ETFs.

Single-stock leveraged and inverse products can result in greater losses than standard products due to the negative compounding effect. For example, if the price of Stock A falls from 100 won to 80 won (-20%) and then recovers to 100 won (+25%), a 2x leveraged product for Stock A would fall from 100 won to 60 won (-40%) and then rise to 90 won (+50%).

Due to high volatility, discrepancies between the Net Asset Value (NAV) of the underlying assets and the market trading price of these products may occur frequently. If the premium widens and investors purchase overvalued products, it can result in investment losses. Therefore, it is important to check the premium information on the Korea Exchange statistics website.

Prior to the launch of these products, the Financial Services Commission has introduced new investor protection measures. To invest in these products, investors must deposit a minimum of 10 million won and complete both a one-hour basic course and a one-hour advanced course through the Korea Financial Investment Association's educational system. Previously, a single one-hour course was sufficient to invest in overseas leveraged ETFs.

For leveraged and inverse products based on single domestic stocks, the authorities plan to exclude them from margin trading eligibility, just as with existing leveraged ETFs. Unlike diversified ETFs, which spread investment across multiple stocks, these products focus investment on a single stock. Thus, the use of 'ETF' in product names will be prohibited, and the fact that it is a single-stock product must be clearly indicated.

At the initial stage of product launch, the authorities will regulate trading activities by executives of listed companies and financial investment firms. They also plan to amend relevant laws and regulations based on operational outcomes. The Financial Services Commission considers single-stock leveraged and inverse products to be equivalent to individual stocks or single-stock futures. As such, executives and major shareholders of listed companies are required to report their holdings to the financial authorities within five days of any transaction. For transactions exceeding 5 billion won or more than 1% of the total volume, the trading purpose and amount must be disclosed 30 days in advance. Trading based on undisclosed information is also prohibited.

In response to market fluctuations, the authorities will restrict the listing of products whose underlying stocks fail to meet specific requirements, such as a market capitalization of at least 10% or trading volume of at least 5% according to the Enforcement Rules of the Financial Investment Business Regulation. For products already listed, if any of these requirements fall below half of the stipulated criteria, a disclosure must be made. Furthermore, if this situation persists for three months, the product may be delisted. To this end, the Korea Exchange plans to amend the Enforcement Rules of the KOSPI Market Listing Regulations next month.

A representative from the Financial Services Commission stated, "We will closely monitor operational outcomes and immediately make any necessary adjustments to further protect investors and ensure financial market stability."

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