In an effort to address the 'asymmetric regulations' that allow overseas purchases but restrict domestic ones, the Financial Services Commission (FSC) has reintroduced high entry barriers for single-stock leverage products less than two months after their launch. The regulatory body has shifted its focus to significantly enhancing investor protection in response to the unexpectedly rapid growth and volatility in the market.
On July 16, the FSC announced supplementary measures for single-stock leverage products, including a temporary suspension of new product listings until market stability is achieved. The basic deposit requirement will increase from 10 million won to 30 million won, and the recognition of substitute securities will be abolished.
Single-stock leverage products were a key initiative outlined in the government's capital market reform plan announced on March 18. At that time, the FSC aimed to introduce single-stock and leverage products, as well as derivative and active products, which are traded overseas but banned domestically, to attract 'overseas retail investors' and enhance market accessibility for both domestic and foreign capital.
Indeed, leverage products for Samsung Electronics and SK Hynix were first listed on the Hong Kong Stock Exchange in May and October of last year, respectively. During a background briefing, Byun Jeong-ho, head of the FSC's Capital Market Bureau, noted, "Domestic investors were directly investing in overseas products with relatively weak investor protection measures. The policy aimed to resolve the asymmetry with overseas markets and prevent the outflow of domestic investment funds while ensuring that domestic investors could invest within a protective framework."
However, market reactions exceeded the authorities' expectations. The single-stock leverage product, which launched on May 27 with a scale of 4.4 trillion won, surged to 15 trillion won at one point, raising concerns of overheating. As of July 15, trading volume reached 13 trillion won, accounting for approximately 38.2% of the entire ETF market. The FSC acknowledged that it would be misleading to claim they had anticipated such demand, admitting that the rapid influx of funds prompted the need for countermeasures.
With the announcement of these supplementary measures, the entry barriers for single-stock leverage products have significantly increased. The most stringent measure is the temporary suspension of new product listings. New products, including inverse and covered call options, will not be allowed until market stability is restored, aside from the 16 ETFs and 2 ETNs currently trading.
The key method for directly curbing investment demand is the enhancement of the basic deposit requirement. Starting around August 5, investors wishing to purchase single-stock leverage products will need to have a basic deposit of 30 million won instead of the previous 10 million won. Notably, from around August 19, only cash will be recognized as the deposit, eliminating the acceptance of substitute securities such as stocks, bonds, and ETFs. This will also apply to existing investors making additional purchases, and the system that allowed brokerages to lower deposit requirements based on trading experience will be abolished.
Byun stated, "The requirement for cash only will be the most significant constraint that investors will feel, and we expect demand to decrease to about one-third of current levels, reducing the market capitalization of these products to around 4 to 5 trillion won."
Furthermore, the strengthened deposit criteria will apply not only to domestically listed single-stock leverage products for Samsung Electronics and SK Hynix but also to overseas-listed single-stock leverage products such as CSOP SK Hynix 2x leverage and Direxion Tesla 2x leverage. This measure aims to prevent a 'balloon effect' where investors shift to overseas products if only domestic products face stricter regulations.
Investment accessibility will also gradually decrease. Starting in November, the minimum trading quantity will increase from 1 unit to 20 units. Products that could previously be purchased for around 20,000 won will now require transactions in approximately 400,000 won increments, encouraging more cautious investment decisions. Single-stock leverage products have been criticized for promoting excessive short-term trading due to their lower investment thresholds compared to direct investments in Samsung Electronics or SK Hynix.
Investor education will also be significantly enhanced. Starting at the end of this month, participants will need to pass assessments for each chapter of the training course before proceeding, and from August, the duration of advanced training will increase from 1 hour to 2 hours. The curriculum will be comprehensively revised to include real cases of widening discrepancies that have emerged since the product launch, allowing participants to better understand the associated risks.
Issues raised during market operations regarding discrepancies will also be addressed. From August, the management criteria for liquidity providers' end-of-day discrepancies will be tightened from 3% to 2%, and new liquidity provider operations may be restricted in cases of intentional or gross negligence violations. The possibility of restricting new ETF listings if management obligations are neglected by operators is also under consideration. The process for designating investment caution items will be shortened from three stages to two, allowing for quicker responses to abnormal signs.
With these measures, the policy direction has rapidly shifted from 'expanding market accessibility' to 'enhancing investor protection,' raising concerns about the consistency of the policy. The FSC stated, "These supplementary measures consider a balanced approach to investor protection, market stability, and market efficiency," adding that if the market does not stabilize, they will consider further tightening entry requirements or implementing regular re-education measures.
However, the FSC distanced itself from the view that the introduction of single-stock leverage products was a policy failure. Byun remarked, "Recent market volatility cannot be solely attributed to single-stock leverage products; it is a result of changes in the global semiconductor market and the concentration of the domestic market in semiconductors."
* This article has been translated by AI.
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