South Korea's Democratic Party K-Capital Market Special Committee is reviewing a reduction in the 2x leverage ratio for single-stock leveraged and inverse exchange-traded funds (ETFs), with the beneficiary meeting approval threshold emerging as the primary procedural hurdle. Under Article 190 of the Capital Markets Act, any change to fund leverage ratios requires approval from at least 25% of total issued beneficial interest units at a beneficiary meeting, or 12.5% at an adjourned meeting held within two weeks if the initial quorum is not met. The review follows investor losses exceeding 40% in some single-stock leverage products within two months of their May 27 listing, alongside heightened market volatility that financial regulators and political leaders, including President Lee Jae-myung, have identified as requiring swift additional policy responses beyond the initial measures announced on the 16th.
Beneficiary Meeting Requires 25% Approval Under Capital Markets Act
Article 190 of the Capital Markets Act mandates that investment trusts establish a beneficiary meeting composed of all investors. Asset management companies operating the funds may convene the meeting, and trust companies holding fund assets or investors holding at least 5% of total units may also request convening. A resolution requires approval from a majority of voting rights present and at least 25% of total issued beneficial interest units. If the initial meeting fails to achieve quorum, an adjourned beneficiary meeting must be held within two weeks, lowering the approval threshold to 12.5% of total issued units. Financial authorities consider leverage ratio changes a fundamental alteration to a product's return structure, necessitating investor approval through this mechanism.
Exchange Delisting Rules Apply to Index Calculation Changes
Current Korea Exchange regulations stipulate that ETFs must undergo delisting procedures if their index calculation methodology changes. Exceptions apply when the exchange determines no investor protection concerns exist, such as when regulatory amendments necessitate the change or when the index's core objective and underlying assets remain unchanged after modification. Political discussions are examining these regulatory provisions as part of the broader policy review.
Financial Services Commission Advances Implementation Timeline for Announced Measures
The Financial Services Commission announced initial supplementary measures on the 16th, focusing on strengthened basic deposit requirements and enhanced tracking error management responsibilities for securities firms and asset managers. Most provisions were scheduled for August implementation, with trading unit changes from 1 share to 20 shares set for November, and immediate implementation of a halt on new single-stock leverage listings and a complete advertising ban. A Financial Services Commission official stated the agency is working to accelerate these timelines, with specific implementation dates not yet finalized as discussions have just begun.
Single-Stock Leverage ETFs Record Over 40% Decline Since May 27 Listing
According to Korea Exchange data, several single-stock leverage products listed on May 27 recorded declines exceeding 40% through the 21st. Products tracking SK Hynix futures with 2x leverage or inverse exposure experienced losses in this range. DB Securities researcher Seol Tae-hyun analyzed intraday trading data, finding that the proportion of closing auction trading volume increased structurally after ETF launches. On days when Samsung Electronics or SK Hynix stock prices moved more than 10%, closing auction trading volume as a percentage of total volume averaged 6.6% for SK Hynix and 5.3% for Samsung Electronics before ETF launches, rising to averages of 9.1% (maximum 13.8%) and 8.9% (maximum 12.5%) respectively after June when ETF launches intensified.
Policymakers Discuss Additional Volatility Control Mechanisms
Beyond leverage ratio adjustments, policy discussions include improving liquidity provider (LP) hedging practices by distributing trades currently concentrated in the final 30 minutes of trading across broader time periods. Additional options under review include introducing a separate volatility interruption mechanism that temporarily halts ETF trading when leverage ETF volume exceeds a certain threshold relative to underlying stock trading volume, expanding coverage beyond Samsung Electronics and SK Hynix to include Hyundai Motor, Naver, and major financial stocks, and implementing account-level leverage concentration limits similar to retirement pension safe asset requirements. An asset management industry executive suggested considering a 10% leverage position limit within individual accounts.
KOSPI Rebounds 5.93% to 7148.02 Following US Semiconductor Rally
As of 9:15 AM, the KOSPI traded at 7148.02, up 400.07 points (5.93%) from the previous trading day, after opening at 7052.09, up 304.14 points (4.51%). The index recaptured the 7000 level intraday following overnight gains in US semiconductor stocks that restored investor sentiment. Samsung Electronics rose over 5% and SK Hynix recovered above 2 million won intraday, triggering a buy-side sidecar on the main board.
FAQ
What approval threshold does South Korea's Capital Markets Act require for ETF leverage ratio changes?
Article 190 of the Capital Markets Act requires approval from at least 25% of total issued beneficial interest units at a beneficiary meeting. If the initial meeting fails to achieve quorum, an adjourned meeting held within two weeks requires approval from 12.5% of total issued units.
How much have single-stock leverage ETFs declined since their May 27 listing?
According to Korea Exchange data, several single-stock leverage products tracking SK Hynix futures with 2x leverage or inverse exposure recorded declines exceeding 40% from their May 27 listing date through the 21st.
