FSS chief compares single-stock leveraged ETFs to 'gambling,' regrets their introduction

Financial Supervisory Service (FSS) Gov. Lee Chan-jin on Monday compared single-stock leveraged and inverse exchange-traded funds (ETF) tied to chipmakers to a “gambling operation” in which intermediaries profit the most.

“[The programs] ultimately serve only to fatten brokerage firms through trading commissions,” Lee said during a monthly press briefing.

Lee’s remarks targeted ETF products tied to Samsung Electronics and SK hynix, which are now seeing overheated trading.

“There's a real question as to whether products that keep investors tethered to the market all day and leave them emotionally drained are appropriate,” Lee said.

On Friday, the FSS issued a consumer alert about single-stock leveraged ETFs listed last month, as they can result in significantly larger losses than conventional ETFs due to their lack of portfolio diversification.

Investors have flocked to the products, more than doubling their combined market capitalization from 4.5 trillion won ($2.92 billion) to 9.6 trillion won just 12 trading days after their launch. During the market downturn between May 27 and June 12, the products posted an average maximum loss of 36.9 percent.

“Despite the consumer alert, the market has not cooled down,” Lee said. “If the stock market experiences a sharp surge in volatility, it could deliver a major shock to households. [The institution] is mulling additional stabilization measures.”

The FSS chief also argued that the ETFs themselves are increasingly driving volatility across the market.

“We are seeing a phenomenon in which ETFs themselves are driving market swings,” Lee said, adding that the trend has become a case of “the tail wagging the dog.”

Lee also criticized the substantial commissions brokerage firms stand to collect as investors actively trade the products.

“Given the high turnout rate and volume of trading, brokerage firms are estimated to earn between 5 trillion won and more than 10 trillion won in commissions,” he said. “In the end, it is the brokerage firms that benefit the most.”

Lee compared the situation to a "gambling operation," where the house and intermediaries end up making more money than the players.

“The players gain little, while the system that sets up, manages and operates the game reaps the profits,” he added. “That’s where the FSS has concerns.”

Lee also expressed personal regret over the introduction of the products.

“I sometimes reflect on whether I should have done everything possible to prevent the introduction of single-stock leveraged products,” he said.

Financial authorities approved the products after growing investment in similar ETFs listed overseas, including in Hong Kong. Out of concern that capital would flow out of Korea, policymakers deemed the programs could help retain that money at home and ease pressure on the dollar-won exchange rate.

“The effect on curbing the won's depreciation was limited, while the side effects have proven far too significant,” Lee said. “The government is giving considerable thought to the issue and is seeking ways to address it.”

The FSS head also agreed with concerns that in-house employee loan programs at conglomerates — especially IT firms — may be contributing to rising home prices.

“Because the FSS is not the policymaking authority, it is difficult to reach a definitive conclusion,” he said. “But personally, I believe some level of regulation may be necessary in the public interest. There may be a technical basis for linking such loans to the debt service ratio.”

The briefing also covered Mirae Asset Securities’ failure to receive shares in a SpaceX private placement offering.

“The FSS's primary concern is whether investor-protection protocols were properly observed,” Lee said. “I personally reviewed the U.S. Securities and Exchange Commission registration filing and had every reason to expect the shares would be allocated.”

The FSS is examining whether Mirae appropriately handled the registration and management of professional investors.

Lee identified financial education for military personnel and students as one of the agency’s top priorities.

"The growing link between gambling and illegal lending among middle and high school students is alarming,” Lee said. “What we see in the webtoon and drama ‘Teach You a Lesson’ is becoming a reality.”

He also pointed to financial difficulties among career military personnel.

“About 6,000 professional service members are currently subject to debt-restructuring programs through the Credit Counseling and Recovery Service,” he said. “Financial education used to be considered a peripheral issue, but I now feel acutely that it has become one of our core policy challenges,” he added.

Lee, additionally, indirectly dismissed the idea of relocating the FSS outside the greater Seoul area.

“Even from a common-sense perspective, it is hard to see how the FSS could move away from the institutions it is responsible for supervising,” Lee said. “Public policy should align with common sense.”

His remarks suggested that relocating the agency would be impractical given that most financial institutions under its supervision are based in Seoul and the capital region.

BY OH HYO-JEONG [[email protected]]