"As Expected, Here They Come": Financial Authorities Unveil New Card as Samsung Electronics and SK Hynix Continue to Rise

'Samsung Electronics Double-Leverage' ETF Could Launch as Early as Q2
Active ETFs Without Index Requirements Also in the Works

As early as the second quarter of this year, leveraged exchange-traded funds (ETFs) with double leverage, based on individual blue-chip stocks such as Samsung Electronics and SK Hynix, are expected to be launched in South Korea.

Dealers are working in the dealing room at the Seoul Hana Bank headquarters on the 30th, where the KOSPI initially started lower but then rose to the 5,220 level in early trading, showing a firm upward trend. Photo by Yonhap News

On January 30, the Financial Services Commission announced the legislative notice and regulatory amendment notice for the "Enforcement Decree of the Capital Markets Act" and the "Regulations on Financial Investment Business," which include these measures, and stated that it will revise related laws and exchange regulations accordingly.

The Financial Services Commission has undertaken these institutional improvements to meet domestic demand for more diverse ETFs. Unlike the United States or Hong Kong, South Korea has not allowed single-stock ETF or exchange-traded note (ETN) products due to diversification requirements, such as a minimum of 10 constituent stocks and a 30% cap per stock.

First, after completing follow-up measures such as amending the enforcement decree and regulations and developing the necessary systems in the second quarter of this year, single-stock leveraged ETF and ETN products will be launched following reviews by the Financial Supervisory Service and the exchange. Leverage will be permitted up to two times, taking into account investor protection and global trends.

In consideration of the high risks associated with single-stock leveraged ETFs and ETNs, investor protection measures will also be strengthened. To invest in the newly introduced single-stock leveraged products, investors will be required to complete an additional one-hour advanced pre-investment education session, in addition to the existing one-hour basic pre-investment education required for leveraged investments. New investors will be required to complete two hours of education before investing in both domestically and overseas-listed single-stock leveraged ETFs and ETNs.

The gap in minimum deposit requirements will also be eliminated. Currently, a minimum deposit of 10 million won is required for domestic leveraged ETF and ETN investments, but not for overseas-listed products. Going forward, the same minimum deposit requirement will be applied to overseas-listed leveraged investments. In addition, to make it clear to investors that domestic single-stock leveraged ETFs do not offer diversification, the use of the term "ETF" will be restricted, and it will be mandatory to indicate that the product is based on a single stock.

In the first half of this year, after revising exchange regulations, a variety of option products, including covered calls, are expected to be launched. Although there has been demand for dividend-type ETFs, such as covered calls that provide regular dividends, in South Korea, most covered call ETFs (71%) have been based on U.S. assets due to restrictions on eligible products and maturities for index and stock options.

The Financial Services Commission plans to expand the range of eligible products and maturities for domestic index and stock options, laying the groundwork for the development of various ETFs. The maturity of weekly options based on the KOSPI 200 and KOSDAQ 150 indices will be expanded (from monthly and Thursday expirations to monthly, Tuesday, Wednesday, Thursday, and Friday expirations). In addition, weekly options and monthly options based on individual domestic stocks and domestic investment ETFs will be newly introduced.

Through amendments to the Capital Markets Act, the introduction of active ETFs without index requirements is also being pursued. While active ETFs that are not linked to an index are common in the United States and elsewhere, in South Korea, ETFs must be linked to a specific price or index, making it impossible to operate fully active ETFs without index linkage. The Financial Services Commission plans to support the submission of a revised bill to the National Assembly in the first half of this year.