The controversy over single-stock leveraged ETFs (Exchange-Traded Funds) is expected to reignite at the National Assembly audit of the Financial Supervisory Service scheduled for the 19th. The broad opposition camp is focusing on the fact that while retail investors incurred losses due to the introduction of single-stock leveraged ETFs, securities firms secured over 90 billion won in revenue through fees. It is anticipated that the point that this ultimately only fattened the pockets of securities firms will be intensely scrutinized. A debate over the responsibility of regulatory authorities is also expected to be unavoidable.
According to the financial investment industry on the 16th, the National Assembly’s Political Affairs Committee will conduct a National Assembly audit targeting the Financial Supervisory Service and others on the 19th. As with the National Assembly audit of the Financial Services Commission, the issue of policy responsibility for single-stock leveraged ETFs is expected to resurface.
During the Financial Services Commission audit, the main point of contention was responsibility for introducing the policy. At the Financial Supervisory Service audit, post-introduction side effects are predicted to be the focus of intense scrutiny. Single-stock leveraged ETFs were introduced with the goal of stabilizing exchange rates by attracting so-called retail investors in overseas stocks from foreign markets into the Korean market. Considering that various leveraged products are traded abroad, the intent was to expand investors’ choice of financial products and enhance the attractiveness of the Korean stock market.
As a result, retail investors flocked to single-stock leveraged ETFs, but most incurred losses. On the other hand, securities firms collected trading fee revenue in exchange for product brokerage, leading to criticism that they ultimately only fattened their own pockets.
According to data submitted by the Financial Supervisory Service to the office of People Power Party lawmaker Choi Eun-seok, the confirmed trading loss amount for retail investors related to single-stock leveraged and inverse ETPs (ETFs and ETNs) was found to be 232.42 billion won. This is based on aggregated data from 10 comprehensive financial investment businesses covering the period from the product launch on May 27 of last year to August 14 of last year.
Conversely, securities firms were found to have earned 93.1 billion won in entrusted trading fees over two months since the product launch. This figure was aggregated by the office of People Power Party lawmaker Kim Jae-seop based on data submitted by the Korea Financial Investment Association, covering the period from the listing of 16 single-stock leveraged ETFs for Samsung Electronics and SK Hynix until the end of July last year.
Initially, there were discussions about the possibility of summoning securities firm CEOs to the National Assembly audit as witnesses, but all witness nominations failed to materialize.
Regulatory responsibility will also be questioned regarding Lee Chan-jin, head of the Financial Supervisory Service. In a regular press briefing in June last year, the head stated, "I regret not having stopped it even by lying down," referring to single-stock leveraged ETFs, which caused a stir. This was because it implied that financial authorities acknowledged that the policy introduction had minimal effects while side effects grew large. Consequently, at the Political Affairs Committee’s business report session in July last year, he apologized, saying, "I deeply feel the responsibility" and "We sincerely apologize."
Measures regarding margin investing (investing with debt) due to recent stock market volatility have also emerged as a major issue. As of the 15th last month, the scale of credit trading financing, which is the amount investors borrowed from securities firms to purchase stocks, reached 3274.98 billion won.
After the Financial Supervisory Service ordered securities firms to strengthen margin investing (investing with debt) management, the Korea Financial Investment Association released a plan to strengthen voluntary management of credit financing last month with 10 comprehensive financial investment businesses, including Mirae Asset Securities and Korea Investment & Securities. The plan includes reducing the scale of credit extension from 100% to within 90% of securities firms’ own capital, and managing the proportion of credit financing for specific stocks within 15%. The Financial Supervisory Service plans to strengthen monitoring to ensure that securities firms comply with the voluntary management measures.
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