FSS: "ETF and ETN Volatility High at Specific Times"

FSS Key Complaint Cases Advisory
"Avoid Receiving Bids at Opening and Closing Price Determination Times"
"Compare Prices with OTC Bonds and Similar Bonds for Investment"
"Retirement Pension Requires Default Option Designation"

Just before the market opens and right before it closes, price volatility of Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs) can increase, so investors should exercise caution. Also, in Individual Retirement Pension (IRP) accounts, a Default Option must be designated to reinvest in principal-guaranteed products such as deposits.

On the 6th, the Financial Supervisory Service announced these points in the "Consumer Precautions Learned from Major Complaints in the First Half of This Year" and urged investors to be careful.

Mr. A placed a market buy order for an ETF product around 3:25 PM, but the order was executed at a price sharply higher than the Net Asset Value (NAV). NAV is the asset value of the ETF itself, calculated by deducting liabilities and related costs from the ETF fund assets. Mr. A requested compensation, claiming that B Securities, the liquidity provider (LP), failed to properly submit liquidity provision quotes, causing losses.

However, according to the Korea Exchange's regulations for the securities market, liquidity provision quotes may not be submitted during the quote acceptance period for closing price determination from 3:20 PM to 3:30 PM, so the complaint was not accepted.

For stocks with insufficient trading volume, liquidity provision quotes may not be submitted during the following periods: ▲8:30 AM to 9:00 AM (quote acceptance period for opening price determination), ▲9:00 AM to 9:05 AM (first 5 minutes after regular market opens), and ▲3:20 PM to 3:30 PM (quote acceptance period for closing price determination). This can cause abnormal market prices for ETFs and ETNs.

Additionally, if demand for ETFs and ETNs surges sharply in a short period, causing supply-demand imbalance, the premium or discount rate?the difference between market price and intrinsic value?may widen, posing a risk of investment losses. For example, even if a rise in international oil prices is anticipated, if investment in oil-linked ETFs and ETNs overheats causing significant overvaluation (sharp increase in premium rate), it may be difficult to realize expected returns after purchase, even if the underlying asset price rises.

When investing directly in over-the-counter (OTC) bonds, it is necessary to compare prices such as yields of similar bonds. OTC bond prices are set by securities firms considering bond procurement costs, sales expenses, market supply and demand, etc., without trading commissions, so prices of similar bonds may differ. The Korea Financial Investment Association's Bond Information Center allows comparison of OTC bond prices with the same credit rating and remaining maturity.

Furthermore, it is necessary to designate a Default Option to prevent retirement pension (DC and IRP) funds from being managed as idle cash. Since the full implementation of the Default Option system, automatic reinvestment of principal-guaranteed products maturing after July 12 has been abolished. Without separate management instructions or designation of a Default Option, maturing funds may be managed as idle cash, resulting in lower investment returns.