Concerns Over Delisting of Leverage Wonyu ETN... "No Forced Liquidation Under Review Currently"

LP Evaluation Results Must Come Out by Late July for Judgment
Issuer Also Weighs Stock Consolidation Over Forced Liquidation

[Asia Economy Reporter Minji Lee] Concerns are growing that leverage crude oil (WTI) exchange-traded notes (ETNs) may be forcibly liquidated before the face value consolidation in September. This is because if securities firms fail to be recognized as liquidity providers (LPs) in the quarterly LP evaluation conducted by the Korea Exchange, the products must be forcibly withdrawn from the market.

[Image source=Yonhap News]

According to the Korea Exchange on the 27th, if Mirae Asset Daewoo, Shinhan Financial Investment, Samsung Securities, NH Investment & Securities, which operate leverage crude oil ETNs, receive an F grade for LP in the second quarter, the exchange will request these securities firms to replace their LPs. Currently, the issuer acts as the LP for ETN products, but if they fail to sign an LP contract with another securities firm within a month, the product will enter the process of forced liquidation.

According to the exchange's operational regulations, for an LP replacement to occur for a stock, the deviation rate must exceed 6% for more than 20 days in a quarter, and the LP must receive an overall evaluation grade of F. Currently, Mirae Asset Leverage Crude Oil Mixed, which is traded in a single-price auction, violated the regulation for 22 days during the second quarter, and the other three suspended stocks violated the regulation for about 16 days. Assuming trading resumes after a three-day suspension throughout the second quarter, all four leverage crude oil ETNs are bound to violate the regulations in the second quarter.

Industry insiders believe that if forced liquidation of the products occurs, investor losses will inevitably increase. Since a face value consolidation is scheduled for September, it is judged that maintaining trading at a more stable deviation rate than before could reduce investor damage. A representative from an ETN issuer explained, “Individuals strongly believe that delisting must be prevented at all costs,” and added, “LPs are also preparing to supply liquidity so that the deviation rate can stabilize following regulatory measures from financial authorities.”

In the market, the deviation rates of leverage crude oil ETN products are gradually narrowing. The expectation of production cuts and the July crude oil price exceeding $30 significantly increased the value of the underlying assets. Mirae Asset Leverage Crude Oil Futures Mixed has maintained a deviation rate below 30%, continuing single-price trading, and the deviation rates of the other three leverage ETNs also decreased to double digits as of the closing price on the 22nd. If the deviation rate falls below 12% for three consecutive days, single-price trading will switch to continuous trading.

However, it is judged that forced liquidation of the products will not occur immediately as the market fears. The Korea Exchange's second-quarter LP evaluation results are expected around the end of July, and until then, the conditions for forced liquidation will not be met. Moreover, due to rapid market changes, the first-quarter evaluation results have not yet been released. Additionally, if the exchange determines that an exception clause in the operational regulations is met, it may not request LP replacement.

A Korea Exchange official stated, “We cannot guarantee that an F grade will not be received, but if there are sudden fluctuations in the underlying assets or no submission of quotes due to political or economic situations, it will be recognized as an exception clause,” and added, “Currently, there is no content under review related to forced liquidation.”