Funeral wreaths calling for the delisting of single-stock leveraged ETFs are displayed near the main gate of the National Assembly in Yeouido, Seoul, on July 29. [Yonhap]
Funeral wreaths calling for the delisting of single-stock leveraged ETFs are displayed near the main gate of the National Assembly in Yeouido, Seoul, on July 29. [Yonhap]

The Financial Services Commission repeatedly cited a regulatory impact assessment by the Office for Government Policy Coordination as part of the approval process for single-stock leveraged exchange-traded funds — but the coordination office says it conducted no such assessment.

The FSC and the Financial Supervisory Service also never requested prior review or consultation from the coordination office, according to officials. The disclosures raise questions about whether financial regulators cited a procedural step that was never actually taken when defending the legitimacy of the ETF launch.

According to documents obtained Tuesday by People Power Party lawmaker Song Eon-seog of the National Assembly's Political Affairs Committee from the Office for Government Policy Coordination, the office conducted neither a regulatory impact analysis nor a regulatory review in connection with the rule amendments that enabled the introduction of single-stock leveraged ETFs.

The coordination office's regulatory review management division told Song's office that regulatory impact analyses and reviews by the Regulatory Rationalization Committee are conducted only when a central government agency creates or tightens regulations. The relevant amendments — which eased investment limits on securities of the same stock — constituted deregulation and were therefore not subject to regulatory review, it said. Article 7 of the current Framework Act on Administrative Regulations requires central government agencies to prepare a regulatory impact analysis statement when creating or strengthening regulations.

The coordination office also said it holds no materials related to its involvement in the ETF introduction process, noting that amendments to the Enforcement Decree of the Financial Investment Services and Capital Markets Act, financial investment business regulations, and Korea Exchange KOSPI listing rules fall under the FSC's jurisdiction.

A separate inquiry by Song's office to the relevant division of the coordination office confirmed that neither the FSC nor the FSS had requested prior review, consultation, or cooperation from the coordination office in connection with the single-stock leveraged product launch. The coordination office said it had not conducted any independent review or been involved in any policy coordination on the matter.

The problem is that the FSC had repeatedly cited the Office for Government Policy Coordination's regulatory impact assessment as evidence of the lawful process followed in introducing single-stock leveraged ETFs.

In a press release dated July 20, the FSC said the relevant amendments had gone through all required procedures, listing public notice, inter-agency consultation, ministry-level impact assessments, review by the Ministry of Government Legislation, FSC deliberation, a vice ministerial meeting, and a Cabinet meeting. The "Office for Government Policy Coordination regulatory impact assessment" was listed first among the ministry-level impact assessments cited.

The FSC again cited the same list of procedures — including the coordination office's regulatory impact assessment — on Aug. 4, after criticism emerged that no stress test had been conducted. A press release issued Aug. 10 also stated that "all necessary procedures were followed" and included the regulatory impact assessment in the procedural checklist. The FSC cited the assessment as one of its grounds for procedural legitimacy on at least three separate occasions.

Questions also persist over whether a sufficient market impact analysis was conducted before the ETFs were introduced. At a plenary session of the National Assembly's Political Affairs Committee on July 29, Song asked FSC Chairman Lee Eok-won whether a market impact assessment or stress test had been carried out at the time of the launch. Lee said one had been conducted and promised to submit the relevant materials.

However, according to Song's office, the materials the FSC subsequently submitted to the National Assembly did not include results from any quantitative stress test — conducted either internally or by an outside institution — that modeled extreme market scenarios such as a sharp drop in individual stocks or a liquidity crunch.

"Claiming that a regulatory impact assessment was conducted when it was not, in order to avoid accountability, is a serious act of deception against the public and the National Assembly," Song said. "The FSC must clearly explain how it came to repeatedly announce that the Office for Government Policy Coordination's regulatory impact assessment had been completed, and disclose the drafting, review, and approval process behind those statements."

Song also raised questions about the accountability of presidential office Policy Chief Kim Yong-beom, FSC Chairman Lee Eok-won and FSS Governor Lee Chan-jin, calling for all three to be dismissed.


fact0514@heraldcorp.com