[BODY]
The government's measures to address single-stock leveraged products aim to curb demand as much as possible by raising the investment hurdle not only for new entrants but also for existing holders. The measures also reveal the government's concern about avoiding hasty direct intervention in the market that could distort prices, opting instead to focus on demand management. However, given that the main cause of volatility in the domestic stock market has stemmed from the share-price volatility of overseas semiconductor companies, many worry that the regulations will undermine the products' original purpose of diversifying investor choice while offering little effectiveness.
According to financial authorities on the 16th, the base deposit for single-stock leveraged products will be raised from the current 10 million won to 30 million won starting the 5th of next month. Since substitute securities will not be included when calculating the deposit, existing investors' purchasing power will inevitably drop sharply. Investors short on cash will effectively be unable to engage in so-called "averaging down." A division-head-level official at one asset management firm said, "It's a method that makes things very inconvenient for investors, so it will have an effect, but it seems aimed at telling those without money to stay out entirely."
The government moved to squeeze demand, even at some cost to investor choice, because it judged that amid the domestic stock market's recent exposure to strong volatility, a "money move" into single-stock leveraged products is weakening supply and demand for individual stocks. A Financial Services Commission official explained, "Simulation results of the demand-suppression measures show that current investment demand for single-stock leverage could be reduced to about one-third."
However, the financial investment industry worries that the government's measures will be ineffective because they fail to account for how exchange-traded funds (ETFs) are actually operated. A prime example is the plan to strengthen tracking-error (deviation-rate) management. The government will tighten the deviation-rate management obligation for brokerages acting as liquidity providers (LPs) from the current 3% to 2%, and impose a penalty restricting new ETF listings for violations resulting from intent or gross negligence. Since a widening deviation rate means investors trade at prices higher or lower than the actual value, the aim is to prevent this.
In response, many in the actual operations field say that because single-stock leveraged products track twice the daily return of the underlying asset, it is natural for the deviation rate to widen depending on market conditions, and that forcibly aligning the deviation rate could worsen the "wag-the-dog" phenomenon.
An official at one asset management firm pointed out, "It's incomprehensible that they claim to ease volatility while trying to control the deviation rate that arises from volatility." Another asset management firm official explained, "To eliminate the deviation rate, you'd have to trade at the closing price, but if you trade at the close, there's a chance the stock could suddenly converge to its upper or lower limit. If orders are placed in advance, then even if the deviation rate widens somewhat, you can prevent economic losses caused by surges or crashes."
Skepticism also dominates regarding the plan to expand the trading unit for single-stock products from the current 1 share to 20 shares. One brokerage official noted, "At 20 shares, that's around Samsung Electronics' current share price, but no one refuses to buy Samsung Electronics because its share price is high. Overall, it's an insufficient measure to cool down market volatility." An executive-level figure at one asset management firm stressed, "Since investment isn't originally done one or two shares at a time, increasing the unit won't reduce demand. I sympathize with the need for the measures, but they're weaker than I expected."
In particular, measures such as raising the deposit and expanding the trading unit will take time to build infrastructure and are scheduled to take effect in August and November respectively, so observers say the market will inevitably continue to swing according to the global semiconductor industry conditions in the meantime. As direct measures such as daily turnover limits and foreign trading caps were left out, some argue that additional measures are needed to substantially reduce demand for single-stock leveraged products. An asset management firm official said, "There are cases of trading leveraged ETFs with funds raised through credit loans collateralized by other stocks such as Samsung Electronics, so a measure fundamentally blocking collateral loans on accounts trading leveraged ETFs will likely be needed."
The government also says it will consider additional regulations if market overheating persists. However, it drew a line against the possibility of delisting single-stock leveraged products. Byun Je-ho, director general of the FSC's Capital Markets Bureau, explained, "There's clearly an effect where investment demand that had gone overseas (through the launch of single-stock leveraged products) has returned and additional outflows have been blocked. Delisting is done when market capitalization shrinks or the correlation coefficient is very poor, so it doesn't meet the requirements."
