Lee Chan-jin, the head of South Korea's Financial Supervisory Service, expressed regret over the introduction of single-stock leverage ETFs, likening them to a 'gambling den.' He also criticized the recent failure of Mirae Asset Securities to allocate shares in the SpaceX IPO and the front-running scandal involving current journalists.
During a press conference on June 22, Lee voiced serious concerns about the increased volatility in the capital markets and the concentration of leverage products. He specifically targeted the Samsung Electronics and SK Hynix single-stock leverage ETFs, which have surpassed 14 trillion won in size since their launch in May.
"These leverage ETFs exhibit an enormous turnover rate," Lee said, noting that at one point, the decline reached 200%, which has since moderated to about 130%. He pointed out that this translates to investors paying between 5 trillion and 10 trillion won in trading fees.
"I feel a sense of discomfort because this situation only benefits the securities firms," he added. "Isn't it often the case that the person who takes the biggest risks in a gambling den ends up making the most money? I am deeply concerned that this could become the reality here."
It is estimated that about 92% of investors in these products are individual investors. Lee noted, "We have confirmed that, due to this leverage structure, there have been instances of declines reaching as much as 37% during consecutive downturns. Despite issuing consumer alerts, the situation continues to worsen."
He remarked that unless investors develop automated trading programs using APIs, they would have to monitor these products all day, raising questions about whether such products are appropriate for the average person. Lee reflected on whether the agency should have blocked the product during its approval process.
"Many of the investors are middle-class or lower-income individuals, so sudden market fluctuations can have a significant impact on their households," he said, adding that he would work with the Financial Services Commission to develop measures to gradually ease the situation from margin trading to credit trading.
Lee also addressed the recent failure of Mirae Asset Securities to allocate shares in the SpaceX IPO, stating that a thorough on-site inspection is underway. He expressed strong skepticism about the situation.
"The unallocated shares, which amounted to over 2.31 million, have caused significant discomfort and dissatisfaction among investors," he said. "We need to investigate whether there were communication issues with the lead underwriter or if there were other factors at play. We will conduct a thorough examination and share preventive measures to avoid recurrence."
He described the situation as "absurd," questioning why the allocation did not occur when funds had already been collected and converted. Lee refuted claims that regulatory pressure led to the failure of the investment.
Additionally, Lee issued a stern warning regarding the recent front-running case involving current journalists, which has resulted in multiple arrests and referrals to prosecutors. He explained that advanced technology is now being used to identify suspicious accounts.
"The volume of trades related to journalist front-running is beyond what we can monitor manually, so we are developing AI-based monitoring systems," he said. "These front-running activities are likely to be easily detected. I hope that only a very small number of journalists engage in such practices, as they will be quickly uncovered."
Lee's deputy, Lee Seung-woo, also emphasized the need for self-regulation among journalists, noting that it was previously difficult to detect front-running due to the short time frames and varying stocks involved. However, he stated that improvements in IT capabilities have made it easier to identify suspicious accounts across multiple stocks.
Lee Seung-woo added that there are likely more front-running cases involving journalists beyond those currently being investigated, urging fellow journalists to avoid involvement in such activities.
Furthermore, Lee announced that the agency has begun investigating allegations that corporate bonds were issued despite recognizing the potential for insolvency at a subsidiary of the JoongAng Group.
"We are currently in the process of examining whether the issuance of corporate bonds was appropriate and may transition to a full inspection if necessary," he stated. "This could be very unfair to investors, as bonds appear to have been sold to individual investors right up until the company went bankrupt." He added that the agency would continue to investigate how this situation arose and would share specific findings based on the inspection results.
* This article has been translated by AI.
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