Mandatory Pre-Investment Education for Overseas Derivatives and Leveraged ETPs to Begin in December

As early as December this year, individual investors who wish to invest in overseas listed derivatives, leveraged exchange-traded funds (ETFs), and exchange-traded notes (ETNs) will be required to complete a certain amount of pre-investment education and simulated trading sessions.

On May 25, the Financial Supervisory Service (FSS) announced that it has prepared measures to protect investors in high-risk overseas financial products, in cooperation with the Korea Financial Investment Association.

The reason for these measures is that, since the COVID-19 pandemic, overseas investments by individual investors have become more active, and investments in aggressive products such as overseas derivatives and leveraged ETPs (including ETFs and ETNs) have also increased rapidly.

According to the FSS, the trading volume of overseas leveraged ETPs by individual investors surged from 20.4 trillion won in 2020 to 397.3 trillion won last year, representing an approximately 20-fold increase. The number of overseas leveraged ETP trading accounts held by individual investors grew from 156,000 in 2020 to 1,967,000 last year. The trading volume of overseas derivatives also rose from 6,282 trillion won to 10,607 trillion won during the same period.

However, individual investors have suffered significant losses in overseas derivatives investments every year over the past five years, regardless of market conditions. In addition, in overseas leveraged ETP investments, investors have shown excessive trend-following trading behavior despite concerns over losses due to increased market volatility.

Individual losses from overseas derivatives amounted to 537.5 billion won in 2020 and 389.9 billion won last year, with losses recorded every year for the past five years.

For these reasons, the FSS has decided it is necessary to establish investor protection measures to foster a sound investment culture, and will make pre-investment education and simulated trading mandatory.

The FSS will issue a certification number upon completion of the pre-investment education and simulated trading, which must be entered into the securities firm's home trading system (HTS) in order to submit orders.

Securities and futures firms will require between 1 and 10 hours of pre-investment education and 3 to 7 hours of simulated trading, depending on the investor's risk profile, experience with relevant financial products, and age.

Additionally, general individual investors who wish to newly trade overseas leveraged ETPs will be required to complete one hour of pre-investment education before they can submit orders. However, since overseas leveraged ETP investments do not carry the risk of losses exceeding the principal, and the trading method is the same as ordinary stock trading, the simulated trading process will not be introduced for these products.

The FSS plans to implement these investor protection measures in December this year. The FSS explained, "We expect these measures to contribute to fostering a sound investment culture by enhancing investors' knowledge and raising awareness of risks."