Asset management companies and securities firms managing single-stock leverage products have decided to distribute rebalancing trades, which usually concentrate near the closing bell, across trading hours, the Korea Financial Investment Association (KOFIA) announced today (July 30).

Leverage products perform daily rebalancing by buying and selling underlying assets to maintain target multipliers. However, this trading activity has faced criticism for concentrating right before market close and thereby amplifying volatility in underlying asset prices.

During an emergency meeting held at the KOFIA conference room at 3:00 p.m. yesterday, eight asset management CEOs—including those from KB, Mirae Asset, Samsung, Shinhan, Kiwoom, Hana, Korea Investment, and Hanwha—along with eight liquidity provider (LP) executives from securities firms, gathered to discuss voluntary response measures aimed at stabilizing the market and protecting investors.

Late that same night, Deputy Prime Minister and Minister of Economy and Finance Koo Yoon-cheol held an emergency market situation review meeting with Bank of Korea Governor Rhee Chang-yong, Financial Services Commission Chairman Lee Eok-won, and Financial Supervisory Service Governor Lee Chan-jin, deciding to impose individual investment limits on single-stock leverage exchange-traded funds (ETFs).

Single-stock leverage products were introduced last May to bridge regulatory gaps between domestic and international markets and to broaden investor choice.

Since their launch, they have been evaluated as having successfully diverted some investment demand previously heading overseas back into the domestic regulated market equipped with investor protection safeguards.

However, industry consensus indicates that the products' impact on the domestic market has turned out greater than expected as market volatility has widened centered around global semiconductor stocks, and retail trading has concentrated heavily on specific stocks and products.

Meeting attendees stated that the industry is taking the recent investor losses resulting from the high risks of leverage products during the expanded volatility phase with utmost seriousness.

Consequently, the industry has decided to pursue four voluntary countermeasures.

First, the asset management industry agreed to disperse rebalancing trades—traditionally concentrated near the market close—across trading hours and after-hours to minimize the impact on underlying assets.

Additionally, asset managers and LP-handling securities firms will continue collaborative efforts to reduce LP trading volumes and closely manage tracking error rates to ensure market stability and investor protection.

Furthermore, they agreed to step up risk disclosures and investor guidance while supporting the smooth implementation of government measures, such as raising the basic deposit requirement and strengthening investor education.

KOFIA and the industry plan to continuously monitor market trends and actively cooperate with government and related authorities on market stabilization measures.

Asset management CEOs made it clear that single-stock leverage products entail high volatility and risk of loss, making them unsuitable for retail investors who do not fully understand product structures and risks, while urging special caution.

KOFIA and the industry will check the implementation status and effects of investor protection measures—such as raising the basic deposit requirement, which takes early effect starting tomorrow (July 31)—and discuss additional measures depending on future retail trading volumes and market volatility.

KOFIA Chairman Hwang Sung-yeop stated, "The industry takes the recent expansion in market volatility and the losses suffered by some investors very seriously," adding, "We will promptly implement voluntary measures such as distributing rebalancing trades and managing LP volumes, and work closely with the government to do our utmost for market stability and investor protection."

(Photo: Yonhap News)