The ruling Democratic Party of Korea and the government launched in-depth discussions Monday on remedies for single-stock leverage ETFs (exchange-traded funds), which have been identified as a key driver of heightened stock market volatility, along with broader capital market reform legislation.
The opposition People Power Party, meanwhile, intensified its attacks on the government over the leverage ETF issue, calling on President Lee Jae Myung to fire Cheong Wa Dae policy chief Kim Yong-beom. The stock market swung wildly, with the gap between the intraday high and low reaching as much as 4.4 percentage points in early trading alone.
Democratic Party lawmakers on the National Assembly's Political Affairs Committee held a closed-door consultative meeting Monday with FSC Chairman Lee Eok-won and officials from the Financial Services Commission and the Financial Supervisory Service to review second-half state policy priorities. A committee official said the session would cover work reports on key issues and a comprehensive review of reform legislation now that the second-half committee has been constituted. The meeting was also understood to have devoted considerable time to the leverage ETF issue alongside a bill on financial support for low-income households.
Cheong Wa Dae has said it is not considering delisting leverage ETFs. Kim appeared Sunday on KBS's "Iryojindan Live" and acknowledged that leverage ETF products have been a primary driver of share price volatility. However, he drew a line against calls from political circles and some market participants for delisting. "If delisting were to happen, that itself would deliver an enormous shock to the market," he said. "It is hard to imagine."
Last week, President Lee directed the Financial Supervisory Service during a work briefing to prepare countermeasures against leverage ETFs. Regulators subsequently announced a package of measures, including raising the minimum deposit requirement for leverage ETF trading to 30 million won ($20,200) in cash and restricting transactions to lots of 20 shares. Authorities projected that the higher investor entry barriers would reduce the market capitalization of single-stock leverage products to roughly one-third of current levels.
Kim said regulators had "conducted extensive deliberations and incorporated a substantial portion of the concerns raised by the market," adding that "once the measures take effect, many of the problems that have been flagged should be largely resolved."
On concerns that leverage ETF products amplify share price volatility by executing large buy and sell orders just before the market close each day to track their target returns, Kim said regulators "need to consider various ways to minimize the impact these products have on the market at specific times." He added that "there is room for further discussion on how to appropriately reduce the selling pressure that arises from closing tracking gaps."
The People Power Party launched a concentrated offensive against the government and the ruling party over leverage ETFs. Floor leader Jeong Jeom-sik said at a supreme council meeting that Kim had "responded with sophistry" to what he called the "Samsung Electronics-SK Hynix single-stock leverage ETF disaster" and that "the government effectively ran a stock-tipping operation targeting the public." He urged President Lee to act: "If President Lee has even the slightest will to normalize the stock market, he must demonstrate that will first through a personnel decision. Fire Kim immediately," Jeong said.
The Kospi continued to show sharp volatility from the opening bell Monday. Korea Exchange data showed the index at 6,704.51 as of 10 a.m., down 1.70 percent from the previous session.
The index opened down 2.60 percent from the previous session at 6,643.58, weighed down by weakness on Wall Street during the Constitution Day holiday period, and at one point fell below the 6,500 level before paring losses. The semiconductor sector's two heavyweights, Samsung Electronics and SK Hynix, were each down around 1 percent.
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