Gov't tightens single-stock leverage rules with individual investment caps

The government will immediately push forward additional measures to curb volatility in single-stock leveraged products, including setting individual investment caps and introducing simulated trading requirements.

Authorities also plan to raise the cost of excessive trading, establish a legal basis for market stabilization measures in emergencies, and pursue improvements to listed companies' corporate value alongside structural reforms to the Kosdaq market.

Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol chairs an emergency market situation review meeting at Government Complex Seoul in Jongno-gu, Seoul, on Wednesday. [Yonhap]

Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol convened an emergency market situation review meeting — known as the F4 meeting — at Government Complex Seoul on Wednesday to discuss recent trends in domestic and overseas financial markets and the government's response.

Attendees included Koo, Bank of Korea Governor Shin Hyun-song, Financial Services Commission Chairman Lee Eok-won, Financial Supervisory Service Director General Lee Chan-jin and Presidential Economic Growth Secretary Ha Jun-kyung.

Participants assessed that the recent stock market decline was driven largely by the spread of concerns over intensifying Chinese competition in the memory chip sector and funding worries at major US technology firms, with investor sentiment and supply-demand instability amplifying the selloff during what was already a correction from a sharp prior rally.

At the same time, they agreed that South Korea's economic fundamentals remain solid — given strong exports in key sectors such as semiconductors, upward revisions to corporate earnings outlooks and a widening current account surplus — and that excessive pessimism about the market's prospects should be guarded against.

However, given that domestic markets have shown unusually large swings compared with other countries and historical norms, officials agreed to conduct a thorough analysis of factors amplifying volatility, maintain the highest level of alert for the time being, and keep a joint 24-hour monitoring system running across relevant agencies.

Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol (from left), Financial Services Commission Chairman Lee Eok-won, Financial Supervisory Service Director General Lee Chan-jin, Bank of Korea Governor Shin Hyun-song and Presidential Economic Growth Secretary Ha Jun-kyung attend an emergency market review meeting at Government Complex Seoul in Jongno-gu, Seoul, on Wednesday. [Yonhap]

Officials agreed in particular that the concentration of investment in single-stock leveraged products risks amplifying market volatility, and committed to immediately rolling out additional measures.

The additional steps include aggregate management through individual investment caps. As an example, a limit of no more than 20 percent of total invested assets was cited as one option under consideration.

Authorities will also pursue a surcharge on excessive trading, drawing on the excessive-order fee already in use in the futures market, and will introduce simulated trading requirements on top of the existing mandatory pre-investment education.

A legal basis will be established to allow authorities to take market stabilization measures in emergencies, taking into account flexible leverage ratio practices in Hong Kong and elsewhere.

Supplementary measures announced July 16 will also be implemented swiftly. Following the suspension of new product listings and a ban on advertising, a basic deposit requirement of 30 million won ($20,500) will apply to all domestic and overseas single-stock leveraged products starting Friday. The deposit must be in cash, and the requirement applies equally to new investors and to additional purchases by existing investors.

In August, authorities plan to expand in-depth investor education, strengthen risk disclosures, tighten obligations and sanctions on securities firms acting as liquidity providers and on asset managers regarding price-deviation management, and raise asset managers' accountability. In November, the minimum trading unit is set to expand from the current one unit to a provisional 20 units.

The government also said it will move quickly on structural reforms to strengthen the capital market's long-term stability, including measures to encourage listed companies to improve corporate value and governance and to reform the Kosdaq market.

Wednesday's meeting was convened as an emergency response after circuit breakers were triggered on both the Kospi and Kosdaq for two consecutive days — the first time in history such a back-to-back activation had occurred on both markets simultaneously.

The Kospi opened at 6,089.11 on Wednesday before plunging sharply, triggering a sell-side sidecar and then a circuit breaker in quick succession. The index failed to recover and at one point fell more than 12 percent during the session, ultimately closing down 360.42 points, or 5.98 percent, at 5,663.24.

As market volatility reached exceptional levels, senior economic and financial officials issued a string of apologies over single-stock leveraged products.

Koo told the National Assembly's Finance and Economy Planning Committee during a regular briefing that he was "sorry for not having been thorough enough when the products were launched." FSC Chairman Lee Eok-won and FSS Director General Lee Chan-jin also apologized before the National Assembly's Political Affairs Committee, saying they were "sorry" in response to criticism that single-stock leveraged ETFs had amplified market volatility.

y2k@heraldcorp.com