Key points
- From August 19, first-time buyers of single-stock leverage funds in Korea must complete five days of mock trading.
- They also need three hours of classes and a 30 million won ($21,200 USD) cash deposit.
- The price difference allowed on all ETFs and ETNs is cut to 2% at home, 5% abroad.
- The funds track Samsung and SK Hynix, where trading already fell to one-thirteenth of its level.
South Korea's Financial Services Commission added another safeguard for the market's highest-risk funds on August 12. Beginning August 19, anyone in Korea making a first-time purchase of a single-stock leveraged or inverse fund must spend five days practicing on the Korea Exchange's free simulator before investing real money. The requirement calls for at least one hour of simulated trading per day and five hours overall. Regulators want prospective buyers to experience how these products can generate losses before putting their own cash at risk.
The repeated scrutiny reflects a mathematical feature that many investors overlook. A single-stock 2x fund targets twice the daily move of its underlying share, but its daily reset can erode returns when the stock moves up and down. "Even if the underlying asset's price comes back to where it started after a while, if it keeps rising and falling along the way, the losses can pile up in a leverage product," the FSC explained. As a result, the stock might finish a month close to where it began while the related 2x fund records a loss. Because the Korea Exchange simulator uses actual market prices, new buyers can observe that effect on paper over five days instead of learning the lesson with their own money.
What it takes to buy one now
The simulated-trading requirement is only one barrier facing new buyers. Before trading, they must also complete three hours of instruction: one basic hour followed by two advanced hours. Their accounts must contain a 30 million won ($21,200 USD) cash deposit, triple the previous 10 million won ($7,100 USD) requirement after the FSC brought the increase forward to late July. That deposit alone pushed the products beyond the reach of most small accounts. Securities can no longer substitute for any part of the 30 million won threshold; the full amount must be held in cash.
The FSC also reduced how far the market price of these funds may stray from their actual value. Although a leveraged ETF is designed to follow its underlying stock, concentrated buying in one direction can lift the fund above fair value, while a seller may receive less than the holding is worth. From August 19, the allowed difference on all ETFs and ETNs narrows from 3% to 2% for Korean-listed products and from 6% to 5% for overseas ones. "With this step the spread management system gets stronger, so investors are less likely to buy ETFs or ETNs for more than they are really worth or sell them for less, and investor protection should improve," the FSC said.
Why the crowd already left
These changes follow an abrupt shift in the market. Korea began allowing single-stock leveraged funds only in May, prompting a surge of money that concentrated largely in Samsung Electronics and SK Hynix (SKHY). Losses then emerged, the higher deposit requirement arrived, and investors withdrew nearly as quickly as they'd entered. Trading volume dropped from 12.4 trillion won ($8.8B USD) on July 30 to about one-thirteenth of that level within a week, while some of the displaced money moved into a bet against the whole index instead. By imposing mock trading, the government's trying to restrain the next rush before it develops.
Only people who hadn't traded these funds before August 18 are subject to the rule. Existing participants are exempt, as are professional investors, companies, and foreign investors. Everyone else must begin a first single-stock leveraged trade in Korea with a week of simulated activity. The government, meanwhile, halted approvals for new single-stock leveraged products in late July and hasn't resumed them, while the FSC says it'll continue adjusting the rules in response to investor behavior.
Sources
- 머니투데이, '계좌 녹는데도 할래?' 매 미리 맞는다…단일 레버리지 모의거래 의무화, on the mock-trading requirement and the negative-compounding warning
- 헤럴드경제, 19일부터 단일종목 레버리지 모의거래 의무화…괴리율 관리 강화도, on the three hours of classes, the spread change, and the FSC's investor-protection comment
- 다음(이투데이), 레버리지 규제 4거래일 만에…단일종목 ETF 거래대금 '13분의 1' 급감, on trading in the funds falling to about one-thirteenth of its level
- Our earlier coverage: the cash-deposit rule's first day, investors doubling down with inverse funds
Figures are converted at approximately 1,416 won to the US dollar. Quotes originally in Korean are translated. This is general market commentary and not investment advice.
