Leverage ETP, New Account Deposit of 10 Million KRW Starting Today

Raised Threshold Due to Investment Soundness Measures
Individuals Must Also Complete Basic Product Education

[Asia Economy Reporter Minji Lee] A basic deposit system will be implemented for investors in leveraged Exchange Traded Notes (ETN) and Exchange Traded Funds (ETF). To invest, investors must also complete basic education on the products, which is expected to restrict liquidity in the ETN and ETF markets.

According to the financial investment industry on the 7th, from this day forward, investors must deposit 10 million KRW as a basic deposit to invest in leveraged or inverse leveraged products. This means that the cash held in the securities trading account and the valuation amount of listed securities must total at least 10 million KRW. The valuation amount of listed securities is estimated by applying a 20% discount to the previous trading day's closing price on the desired purchase date. If an investor holds multiple accounts, a deposit of 10 million KRW must be made for each account.

This is the core content of the "ETP (ETNㆍETF) Stabilization Measures" announced by financial authorities in May. Amid increased market volatility in the first half of the year due to the novel coronavirus (COVID-19), the rise in trading of crude oil leveraged ETNs, index leveraged ETFs, and inverse leveraged ETFs known as 'Gopbus' led to mounting losses for individuals, prompting measures to block indiscriminate market entry.

▲Seoul Yeouido Stock Exchange District View

The deposit system does not apply to all investors wishing to trade leveraged products. It targets individual investors excluding institutional investors and other professional investors, with deposit amounts varying by securities firm depending on investment experience and credit status. The deposit scale is divided into three levels: Level 1, Level 2, and Level 3, with Level 2 uniformly applied by all securities firms to investors registering derivative ETN and ETF accounts for the first time.

For example, Shinhan Financial Investment presents two criteria for Level 1: if the purchase amount is 10 million KRW or more, or the average balance in the previous month is 5 million KRW or more, the deposit is waived. If only one of these is met, a deposit of 5 million KRW applies. For debt defaulters or investors not qualifying for Levels 1 or 2, a deposit requirement of 30 million KRW is applied. Samsung Securities offers three criteria for Level 1: if 90 days have passed since the domestic derivative ETN and ETF trading application date, the average balance over the past three months is 5 million KRW or more, and the total purchase amount of leveraged ETN and ETF in the previous month is 10 million KRW, the deposit is waived. If only the first two conditions are met, a deposit of 5 million KRW is required. Investors not qualifying for Levels 1 or 2 must deposit 15 million KRW.

Individual investors, except for discretionary contract holders, must complete investor education regardless of the deposit amount. Investors currently holding leveraged ETNs and ETFs must complete the education by the end of this year; failure to do so will restrict additional purchases starting next year.

The market expects this measure to likely limit small individual investors' access to the ETN and ETF markets. The impact is anticipated to be greater on ETNs than ETFs. Since individual investors account for two-thirds of total trading volume in ETNs, trading contraction is expected to be more severe compared to ETFs, where the trading proportions of individuals and foreigners are similar. Jeon Gyun, a researcher at Samsung Securities, stated, "The net asset value of leveraged ETFs in the ETF market accounts for one-sixth of the entire ETF market, so investor withdrawal is unlikely to be significant. However, leveraged ETFs using KOSDAQ150, which have a high proportion of individual investors, may see a reduction in asset size."

Meanwhile, as part of the ETN market stabilization measures, ETNs using KRX300 will be launched in the third quarter. Currently, KB Securities is preparing for listing, and ETNs using KOSDAQ150 are also expected to be issued in the future.