Korea Demands Five-Day Simulated Trading for Leveraged ETFs

South Korea's Financial Services Commission will require new retail investors to complete five days of simulated trading before buying single-stock leveraged ETFs, extending a crackdown that has already cut daily turnover by 94 percent.

"While stock market volatility has partially eased recently, uncertainties remain, so relevant agencies will closely monitor market conditions while rapidly advancing supplementary measures for single-stock leveraged products," an FSC official said.

From Aug. 19, new buyers of domestic and overseas-listed leveraged and inverse ETFs and exchange-traded notes must hold KRW 30 million ($21,180) in cash, finish three hours of education and pass the Korea Exchange simulation — at least one hour a day across five trading days. The sessions need not be consecutive, and the free service runs on the exchange's website.

The rules cap a two-month tightening that began after retail investors poured KRW 8.2 trillion into the products, most tied to Samsung Electronics and SK Hynix. Daily turnover has collapsed to KRW 700 billion from KRW 12.4 trillion since the cash threshold tripled on July 31, and authorities are weighing further curbs including a 20 percent cap on holdings.

Cash Rule Already Cut Turnover by 94%

The deposit threshold has already reshaped trading. Daily turnover fell from KRW 12.4 trillion, about $8.4 billion, on July 30 to KRW 700 billion on Aug. 11, a drop of 94.35 percent, according to the FSC. The products also recorded KRW 1.4 trillion of net redemptions between Aug. 4 and Aug. 10.

The threshold rose from KRW 10 million to KRW 30 million on July 31, and authorities stopped brokerages from lowering the amount for experienced clients — a discretion firms previously received after three months of trading. Stocks, bonds and other securities no longer count toward the balance; cash from a securities sale is recognized only after settlement at T+2, and loans secured against sold assets are excluded.

Demand had built quickly after Korea introduced the products on May 27. Korea Capital Market Institute research estimated that retail investors made about KRW 8.2 trillion of net purchases in leveraged funds through June 19, most tied to Samsung Electronics and SK Hynix. The concentration mattered because the funds rebalance daily in the same underlying chip stocks. Reuters reported in July that Samsung Electronics, SK Hynix and their leveraged products accounted for more than 80 percent of KOSPI trading volume on some days.

The simulation is designed to show how daily-reset products can lose value through negative compounding, a structural risk that can produce losses even in a flat market. The regulator already uses mock trading for new futures, options and short-selling participants.

Price Controls Tighten Across the ETF Market

The Aug. 19 package also changes how liquidity providers manage gaps between an ETF or ETN's market price and the value of its assets. For domestically listed products, the permitted premium or discount threshold falls to 2 percent from 3 percent. For overseas-listed products, it drops to 5 percent from 6 percent. Unlike the simulation, these controls apply across the ETF and ETN market, not only to single-stock leveraged products.

KRX is preparing rules that could prevent liquidity providers from taking on new products if they intentionally or repeatedly breach the pricing duty. It will also shorten the process for placing a product on the investment watchlist from three stages to two. When tracking error exceeds twice the management standard — 4 percent for domestic products and 10 percent for overseas — the security becomes subject to designation as an investment caution issue, triggering single-price trading for three days.

Korean authorities suspended new single-stock product listings and related advertising on July 16. They are also considering a cap that could restrict an individual's holdings to 20 percent of financial investment assets, though Wednesday's decision did not implement that proposal. A separate plan would raise the minimum domestic trading lot from one share to 20 shares, a change the FSC originally targeted for November.

The tightening sets Korea apart from markets where retail leverage is expanding. In July, Bitpanda introduced margin trading on more than 875 stocks, ETFs and commodities for European users, with exposure of up to 20 times capital. Korea allowed single-stock ETFs and ETNs in April to narrow the regulatory gap with overseas markets, but the eligibility criteria restrict the first domestic generation to large, liquid companies such as Samsung Electronics and SK Hynix.

For asset managers and brokerages, the rules shrink a market that briefly became one of the most active corners of the Korean equity complex. The 94 percent drop in turnover and KRW 1.4 trillion of redemptions have already hit fee income tied to the products, and the simulation requirement will slow new retail entry further. With a 20 percent holdings cap and a larger minimum lot still under review, the FSC's next decisions will determine whether the segment stabilizes at a smaller scale or continues to contract.

This article is for informational purposes only and does not constitute investment advice.