"A 30 Million Won Deposit in an Account Paying 1% Interest?" ... If Only Retail Investors Are Targeted, Is a Leveraged ETF Really Fair?

[Financial News] The financial authorities are facing criticism that their measures to cool the overheated market for single-stock leveraged exchange-traded funds (leveraged ETFs) amount to a half-baked regulation that puts pressure only on individual investors. 

On the 16th, the Financial Services Commission (FSC) announced a supplementary measure that raises the basic customer deposit requirement for single-stock leveraged ETFs from 10 million won to 30 million won and requires the full amount to be deposited in cash.
Previously, 70% of the deposit could be covered with substitute securities such as held stocks, meaning the actual cash needed was around 3 million won. Under the new rule, the cash-based entry barrier has risen roughly tenfold.
In addition, from November, the trading unit will expand from one share to 20 shares, and the pre-trading education requirement will increase to three hours. The standard for liquidity providers' duty to manage closing-price deviations will also be tightened from 3% to 2%.
The move follows a sharp rise in market volatility after the product was listed on May 27, with the KOSPI sidecar being triggered 18 times.
The authorities expect the single-stock leveraged market, which has grown to about 12 trillion won, to shrink to around 4 trillion to 5 trillion won after the regulations take effect.

The problem is that these tough regulations are effectively being imposed only on individual investors.
Individual investors are already pushing back strongly. In the market, complaints are pouring in, with remarks such as, "Why regulate only retail investors?" "Does it make sense to lock up 30 million won in an account paying 1% interest?" and "Are you telling us to take out loans and invest with borrowed money just to meet the deposit requirement?"
In fact, the higher deposit requirement applies only to ordinary individual investors, who account for about 37% of trading volume in the single-stock leveraged ETF market. The remaining more than 60% of the market, dominated by foreign investors and institutional investors, has escaped the regulatory net. Among individual investors, those classified as professional investors are exempt.

Even in the financial investment industry, there are concerns that the measure may help cool short-term overheating, but it falls short of being a fundamental solution.
At the root of the runaway volatility in leveraged ETFs is a profit structure in which securities companies and asset management companies endlessly expand fund size through new launches.
That is why critics say the authorities have left the structural contradiction untouched, allowing asset management companies and securities companies to keep growing without limit and collect fees, while only tightening the liquidity providers' deviation threshold and blocking the entry barrier for ordinary individual investors.
For that reason, voices are growing louder that the answer is not to forcibly suppress the investment demand of unfairly burdened individuals, but to systematically curb indiscriminate expansion by raising the new issuance fees that securities companies pay to asset management companies.


[email protected] Sung Min-seo Reporter