Starting August 19, the management standards for discrepancy rates of exchange-traded funds (ETFs) and exchange-traded notes (ETNs) will be strengthened. Individual investors looking to make new investments in single stock leverage and inverse products will be required to complete a minimum of five trading days and a total of over five hours of simulated trading, in addition to the basic deposit and prior education.
According to the Financial Services Commission (FSC) on August 12, the commission held its first temporary regular meeting and approved amendments to the Korea Exchange's securities market regulations. This measure follows the supplementary measures for single stock leverage products announced by relevant agencies on June 16 and 29.
First, the obligation for securities firms to manage discrepancy rates for all ETFs and ETNs will be strengthened. The management standard for discrepancy rates based on closing prices will be reduced from 3% to 2% for domestic products and from 6% to 5% for foreign products. The calculation criteria will also be clarified, applying the absolute value when the discrepancy rate is calculated as a negative percentage.
Sanctions against liquidity providers (LPs) who repeatedly violate the discrepancy management obligations will also be strengthened. The Korea Exchange plans to limit new liquidity provision activities for securities firms that intentionally or grossly violate these obligations through amendments to its operational regulations.
The procedure for designating investment caution items will be simplified from three stages to two. If the discrepancy exceeds twice the mandatory range of 2% for domestic and 5% for foreign products, a notice will be issued simultaneously with the designation, and if it exceeds twice the mandatory range again within ten trading days from the notice date, it will be designated as an investment caution item. If the criteria are exceeded for two consecutive trading days, designation can occur in as little as two trading days.
Once designated as an investment caution item, single-price trading will be applied for three trading days. If the discrepancy falls within the mandatory range for three consecutive trading days, the designation will be lifted. If the discrepancy expands to more than three times the mandatory range on the last day of single-price trading, trading will be suspended for one day before resuming single-price trading.
Simulated trading for single stock leverage and inverse products will also become mandatory. Starting August 19, the Korea Exchange will expand its simulated trading services, previously offered for futures, options, and short selling, to include domestic and foreign single stock leverage products.
As a result, individual investors looking to make new investments in domestic and foreign single stock leverage products will need to complete simulated trading in addition to the existing basic deposit of 30 million won and prior education. The prior education consists of one hour of basic training and two hours of advanced training, totaling three hours. The advanced training has been extended from one hour to two hours since August 7.
Simulated trading can be accessed for free on the Korea Exchange's website. Investors will use virtual funds provided by the system to trade in a manner similar to actual transactions based on the day's market prices.
In particular, the requirements for simulated trading for single stock leverage products have been set more strictly than for general products to allow new investors to directly experience the negative compounding effects. New investors must complete more than five trading days of simulated trading, with at least one hour of trading each day. While it is not necessary to participate continuously every day, a total of over five hours must be completed.
For new investments in foreign single stock leverage products, a separate system will not be established, and investors will be required to complete simulated trading services based on domestic data. The relevant regulations from the Korea Financial Investment Association are currently undergoing revision.
The financial authorities have noted that while volatility in the stock market has somewhat eased, there are still factors contributing to market instability, and they plan to support the establishment of related systems. The FSC and the Korea Exchange, along with other relevant agencies, will closely monitor market conditions while implementing the supplementary measures for single stock leverage products announced last month.
Meanwhile, following the strengthening of the basic deposit to 30 million won on July 31, trading volume for single stock leverage products has sharply decreased. According to the FSC, trading volume for single stock leverage products increased from 10.4 trillion won on May 27 to 12.4 trillion won on July 30, but fell to 700 billion won on August 11, representing only 5.6% of the volume on July 30. Between August 4 and 10, there was a redemption of 1.4 trillion won.
* This article has been translated by AI.
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