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As part of follow-up measures for single-stock leverage products, the government will strengthen discrepancy rate management standards for exchange-traded funds (ETFs) and exchange-traded notes (ETNs) starting on August 19.
In addition, mock trading will become mandatory when investing in single-stock leverage products, including inverse products.
The Financial Services Commission (FSC) announced today (August 12) that it held its first extraordinary regular meeting and approved the amendment to the Enforcement Regulations of the Korea Stock Exchange.
Through this revision, securities firms' obligation to manage discrepancy rates (based on closing prices) for all ETFs and ETNs will be tightened from the current 3% for domestic and 6% for overseas to 2% for domestic and 5% for overseas.
Furthermore, standards have been clarified, such as calculating negative discrepancy rates using their absolute values.
In addition, the Korea Exchange (KRX) plans to restrict new liquidity provision activities of securities firms (liquidity providers, or LPs) that intentionally, with gross negligence, or habitually violate discrepancy rate management obligations, through an amendment to the detailed enforcement rules of the exchange's securities market business regulations.
The designation procedure for investment-cautionary issues will also be streamlined from the current three stages (extraction, designation notice, designation) to two stages (extraction and designation notice, designation).
The FSC stated, "With these measures, the discrepancy rate management system will be strengthened, enhancing investor protection by mitigating the possibility of investors buying or selling ETFs and ETNs at prices higher or lower than their actual values."
Additionally, starting on August 19, the exchange will operate free mock trading for investments in domestically and overseas-listed single-stock leverage products.
This is an expansion of services currently applied to futures and options trading as well as short selling.
It is aimed at reinforcing investor protection measures by ensuring that investors acquire sufficient experience before making new investments.
Accordingly, individual retail investors who wish to newly invest in domestically or overseas-listed single-stock products must complete mock trading starting on August 19 in order to invest in domestic and overseas single-stock leverage products.
Access is available via the exchange website, and users can experience a mock trading environment similar to actual trading by executing trades at current prices using virtual investment funds provided within the system.
In particular, to allow prospective investors to fully experience the negative compounding effect and make investment decisions, mock trading is required for a total of 5 trading days or more (no daily attendance requirement), for at least 1 hour per trading day (total of 5 hours or more).
Considering the similarity in product structures, those wishing to newly invest in overseas single-stock leverage products will also be required to complete mock trading without building a separate system.
The FSC diagnosed that following the hike of the basic deposit requirement to 30 million won in cash on July 31, transaction values for single-stock leverage products plummeted to less than one-fifteenth of the previous day while sector rotation is occurring.
It added, "Although volatility in the stock market has shown signs of easing recently, lingering risk factors remain, and relevant agencies plan to closely monitor market conditions while rapidly pursuing complementary measures for single-stock leverage products."
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