Korea Exchange Abolition Under Review... Partial Improvement Expected in Samsung Electronics Supply and Demand
[Asia Economy Reporter Kum Bo-ryeong] The Korea Exchange is actively considering removing the so-called '30% cap' regulation.
The Korea Exchange announced on the 2nd that it is collecting opinions from institutional investors until the 22nd regarding improvements to the market capitalization weight limit system. The main content involves not applying the market cap limit (cap system) previously used in calculating the constituent stocks of the KOSPI200 and KRX300 indices.
The KOSPI200, composed of 200 blue-chip stocks representing the KOSPI market, restricts the market capitalization weight of any single stock from exceeding 30% when selecting constituent stocks. This is because if a particular stock's weight becomes too large, the index's volatility may increase due to the stock's price fluctuations, reducing stability.
The issue is that since the end of last year, Samsung Electronics' stock price has surged sharply, causing its market capitalization weight within the KOSPI200 to exceed 30%. As of the 31st of last month, Samsung Electronics accounted for 33.07% of the KOSPI200.
If the 30% cap is applied, domestic and foreign asset management companies operating index funds and exchange-traded funds (ETFs) tracking the KOSPI200 must sell Samsung Electronics shares exceeding the 30% threshold. Considering that the ETF assets tracking the KOSPI200 amount to about 17 trillion KRW, a simple calculation suggests that approximately 500 billion KRW worth of Samsung Electronics shares could be sold.
The securities industry has long called for easing the regulation. The Exchange had planned to limit Samsung Electronics' weight through ad-hoc changes before the regular index revision in June, but decided not to proceed with ad-hoc changes considering investors' opinions and potential market shocks.
Recent improvements in fund operation regulations also support the removal of the cap system. Separately from the Exchange's cap system, there was a regulation preventing any single stock from exceeding 30% of the assets under management within a fund, but with the revision of the Enforcement Decree of the Capital Markets Act, this 30% limit within funds was removed as of the 1st of this month. Instead, it was changed to allow stocks to be included according to their weight within the index.
Along with this, if the cap system is improved, it is expected that supply and demand will partially improve because foreigners and institutions will no longer be forced to sell Samsung Electronics shares.
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