Authorities consider introducing ‘high-risk leveraged ETFs’... Will triple-leveraged products for Samsung Electronics and SK hynix emerge?

[The Financial News] The financial authorities are reviewing the introduction to the domestic market of high-risk investment products such as single-stock leveraged exchange-traded funds (leveraged ETFs) that provide two to three times exposure to underlying assets like Samsung Electronics Co., Ltd. and SK hynix Inc.
According to the financial investment industry on the 18th, the financial authorities have begun work to improve the regulatory framework for leveraged products. At present, in the domestic stock market, the listing of leveraged ETFs based on individual stocks and of triple-leveraged products is effectively not permitted.
Kim Yong-beom, Chief Presidential Secretary for Policy at the Office of the President of South Korea, recently said, “I raised the question with the Financial Services Commission (FSC), asking, ‘Why are products allowed on the Nasdaq but not in the domestic market?’ and instructed them to review the matter.”
Currently, the FSC limits the weight of any single stock to 30% when constructing an exchange-traded fund (ETF) and requires that at least 10 different stocks be included. Leveraged ETFs with a leverage ratio of three times or more cannot even undergo listing review.
These regulations were introduced with the stated aim of protecting investors by taking investment risk into account. However, critics point out that they have had side effects, such as prompting investors to shift funds into overseas stocks, as ETFs that provide double exposure to Korean stocks are being listed abroad.
Representative examples include the SK hynix 2x leveraged ETF listed on the Hong Kong Stock Exchange, CSOP SK Hynix Daily (2x) Leveraged ETF (XL2CSOPHYNIX), and the Samsung Electronics 2x leveraged ETF, CSOP Samsung Electronics Daily (2x) Leveraged Product (XL2CSOPSMSN). According to Korea Securities Depository (KSD), over the three months from October 17 last year to the 16th of this month, Korean retail investors made net purchases of 66.59 million dollars (about 98.3 billion won) and 26.71 million dollars (39.4 billion won), respectively, in these two products. Overseas asset managers have also listed other products such as a Korea Composite Stock Price Index (KOSPI) 3x leveraged ETF.
However, the financial authorities are reportedly taking a cautious stance on introducing high-multiple products. The concern is that in a declining market, unlike the bull market seen last year and early this year, leveraged products could further accelerate stock price drops.
Meanwhile, alongside pushing for institutional reforms, the financial authorities also plan to strengthen supervision and oversight to prevent overheating in overseas investment sales. The Financial Supervisory Service (FSS), which inspected the overseas business operations of securities firms at the end of last year, is said to have recently conducted on-site inspections of Samsung Securities Co., Ltd. and Mirae Asset Securities Co., Ltd., following Toss Securities and KIWOOM Securities Co., Ltd. last month.

koreanbae@fnnews.com Bae Han-geul Reporter