Regulators accept blame for leveraged ETF turmoil as lawmakers demand probe

Korea's two top financial regulators accepted responsibility Wednesday for the part that single-stock leveraged exchange-traded funds (ETF) have played in the stock market's violent swings.

At a National Policy Committee session at the National Assembly in western Seoul, lawmakers from both the ruling and opposition parties called for a parliamentary investigation into the financial authorities and questioned the Blue House's role in bringing the products to market.

The session on Wednesday came as the Kospi was halted by a circuit breaker for a second consecutive day — the first time in the Korean benchmark's history.

The charge that the funds were rushed out came first from the ruling Democratic Party (DP).

"There are a lot of questions about whether this was launched under outside pressure rather than on the Financial Services Commission's (FSC) own initiative, and about whether the listing requirements, including investor protections, were reviewed thoroughly enough," said the DP's Kim Yong-man, who asked the first question.

The main opposition People Power Party (PPP) widened the attack to the government as a whole.

"The launch of the leveraged ETFs was a man-made disaster that originated at the FSC and the Financial Supervisory Service (FSS)," said PPP lawmaker Park Dae-chul. "The government is turning the public into rent refugees and stock-market beggars."

Park Sung-hoon of the same party raised the case for a parliamentary investigation.

"If the product was approved in haste, accountability has to be clear, and that includes legal and administrative accountability," Park Sung-hoon said.

Both regulators accepted a share of the blame.

"I take seriously our responsibility for the increase in market volatility caused by the leveraged ETFs," said Lee Eog-weon, chairman of the FSC.

Lee Chan-jin, governor of the FSS, took the same line and promised action.

"We accept the weight of our responsibility [for increasing market volatility]," Lee Chan-jin said. "We will do everything we can to minimize the volatility."

The parliamentary committee put forward four more safeguards. They want the basic investor deposit raised again to 50 million won ($34,500), up from the 30 million won that takes effect this week, and the leverage ratio cut below 2x. They also want a floating structure that would let asset managers vary the leverage ratio between 1x and 2x as market conditions change, and new purchases restricted to professional investors.

The financial authorities said they would review the package as a whole.

"If necessary, we will consider raising [the deposit] further," Lee Eog-weon said. "Lowering the ETF leverage ratio would be effective in easing volatility."

He also signaled a cap on how much any one investor can hold.

"One option is to set a limit, within 20 percent, on the share of an investor's total holdings that can sit in leveraged ETFs, and to raise the bar for new purchases by professional investors," Lee Eog-weon said.

He added that the commission would work with the industry to disperse asset managers' rebalancing trades so they do not cluster near the close, and to reduce brokerages' trading volumes.

Attention also turned to Kim Yong-beom, the presidential director of national policy, who drove the introduction of the products.

"The product came to market less than five months after Kim Yong-beom ordered a review of its introduction early this year," Park Sung-hoon said. "The state laid out a gambling table, and retail investors' cash is melting away."

The presidential policy chief, who is traveling with President Lee Jae Myung on a South American tour, pushed back when he met reporters in São Paulo on Tuesday.

"People talk as if every problem comes down to this one thing, but it doesn't," Kim said. "Our high volatility is bound up with the character of a market where individual investors trade dynamically."

BY KIM DO-NYUN [[email protected]]