San Francisco Frontiers - South Korea president urges regulator action on leveraged stock funds

The country's main bourse KOSPI in late May introduced single-stockleveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK hynix respectively -- both forecasting record profits as critical memory chip producers for the fast-growing AI industry.

The aggressive investment products are tailored to pay out twice the profits of a single stock but also twice the losses, and have been criticised for exposing retail investors to market hype and volatility.

Since the new ETFs were listed on May 27, the stocks of Samsung and SK hynix have fallen around 16 percent and 20 percent each, leaving speculators with highly amplified losses.

At a Tuesday cabinet meeting President Lee Jae Myung told head of the Financial Services Commission to "take the necessary measures quickly and aggressively".

In a livestream of the summit he did not explain what measures he endorsed -- saying there were "two competing views" over the ETFs tied to national flagship tech firms.

"Supporters argue that the products have helped reduce capital outflows by giving South Korean investors domestic alternatives to overseas single-stock leveraged ETFs," he added.

"Critics, however, contend that they have increased market volatility by encouraging speculative trading," he said.

Lee Chan-jin, governor of South Korea's Financial Supervisory Service, already last month admitted regulators had greenlit the ETFs too hastily.

"Maybe I should have lain down on the floor to block it. I personally regret it," he said.

The government last week tightened rules governing the products -- raising the minimum deposit to 30 million won ($20,280) and requiring investors to fund purchases fully in cash.

A South Korean NGO, Economic Democracy 21, said the government failed to protect individual investors when introducing the leveraged ETFs.

Regulators should have been careful given such products are "inherently high-risk because the compounding effect can wipe out an investor's entire principal over a short period," it said in a statement.

A single-stock leveraged fund, it added, "fundamentally conflicts with diversification requirements imposed on conventional public funds, making that ETF structure unacceptable".

The KOSPI has surged this year, buoyed by sharp gains in Samsung Electronics and SK hynix.

The index has risen 58 percent so far this year but the rally has also been marked by heightened volatility.

After reaching a record high of 9,385 on June 19, the KOSPI had fallen 28 percent as of Tuesday morning.

A.Smith--SFF