The Financial Services Commission announced a plan to move up the implementation of the strengthened minimum deposit requirement for investing in single-stock leveraged products (exchange-traded funds and exchange-traded notes) on July 24. The earlier planned implementation schedule from August this year will move up to July 31 to quickly help to stabilize demand.
On July 16, the FSC and related authorities introduced a set of measures intended to strengthen the management of single-stock leveraged products to help to stabilize demand and protect investors.
After the announcement of the measures, the measures to prohibit new listings of single-stock leveraged products and ban financial investment businesses from engaging in advertising and marketing activities went into effect immediately from July 16. Since then, the financial authorities have worked closely with financial investment businesses to quickly implement the measures and have prepared a plan to move up the implementation schedule.
Early Implementation of Strengthened Deposit Requirements
(1) Moving up implementation schedule to July 31
The earlier planned implementation schedule for the strengthening of the minimum deposit requirement from August this year will move up to July 31 to quickly help to stabilize demand.
Currently, retail investors are required to deposit at least KRW10 million to make new investment in single-stock leveraged products (for both domestically listed and overseas listed). However, when calculating the minimum deposit amount, 70 percent of market values of substitute securities, such as stocks, ETFs (excluding leveraged ETFs), and bonds on the investor’s account was counted toward the deposit amount along with cash. Moreover, after three months of trading, securities firms would ordinarily have more leeway in lowering or strengthening the minimum deposit requirement for investors after taking into account the trading experience of investors.
To improve upon this and to make sure that investors are making new or additional investment in single-stock leveraged products (for both domestically listed and overseas listed) while being fully aware of the risk involved and having a sufficient level of risk tolerance, the minimum deposit requirement is set to be raised to KRW30 million. In addition, this newly set minimum deposit amount will only take into account cash and will not include substitute securities.
Considering the time it would take for individual securities firms to develop their own computing systems to implement the measures, the raising of the minimum deposit requirement to KRW30 million from KRW10 million currently was initially scheduled to take effect from around August 5 this year, while prohibiting the recognition of substitute securities was scheduled to take effect from around August 19. However, to more quickly help to stabilize demand, the implementation schedule has been moved up after seeking active cooperation for developing computing systems from financial investment businesses. For those that fail to meet deadline for developing their own computing systems, the financial authorities plan to recommend a suspension of new transactions in single-stock leveraged products.
Therefore, in accordance with the moved up implementation schedule, from July 31, investors will be able to purchase single-stock leveraged products (both domestically listed and overseas listed) only if they have KRW30 million or more in their accounts in cash amount. Additionally, from July 31, securities firms will no longer have leeway in allowing the easing of the minimum deposit amount for investors even after they gain investment experience after a certain period of trading (however, requiring a higher minimum deposit amount will still be possible).
Moreover, there will be additional improvements to the ways in which minimum deposit amount in cash is being recognized.
Currently, when a sale of substitute securities takes place, the amount of the sale taking place is immediately recognized as cash at the time of the transaction taking place. However, when considering the T+2 settlement period, this makes it possible for investors to newly purchase single-stock leveraged products before cash is actually deposited into the account, which raises concerns over negative effects on the purpose of the strengthening of the minimum deposit amount.
Thus, for single-stock leveraged products (both domestically listed and overseas listed) only, the sale of securities will be recognized as cash amount at the time of the actual cash deposit taking place (T+2) to prevent investors from selling their substitute securities to immediately purchase other securities in an excessive manner. However, for purchasing securities, the cash amount for the purchase will continue to be deducted immediately from the deposit amount at the time of the transaction taking place as it is the current practice.
In addition, the amount of loan taken for the sold securities will not be recognized as cash amount in the calculation of the minimum deposit amount.
With the strengthened minimum deposit amount in place, making additional purchases of single-stock leveraged products by current investors will also be subject to the enhanced deposit requirements. Thus, investors are advised to approach with caution in making their investment strategies and decisions.
(2) Management of premium/discount rates and improvement for minimum trading lot
The measures to strengthen the responsibility of securities firms and asset management companies in managing the premium/discount rates of single-stock leveraged products and to streamline the process for designating items to be included in the investment watchlist will go into effect from August 19 after making revisions to relevant rules.
For the planned expansion in the size of minimum trading lot from one share per trading lot currently to 20 shares per trading lot for domestically listed single-stock leveraged products, the authorities will also consider moving up the implementation schedule to an earlier date from the initial plan for implementation in November.
Further Plan
The FSC and related authorities will work to quickly implement the measures and continue to closely monitor market conditions to assess the effects of the introduced measures and seek to draw up additional measures if it becomes necessary in close consultation and discussion with market experts and investors.
At the same time, the FSC and related authorities will make continuous efforts to promote the KOSDAQ market, facilitate long-term investing practices, and introduce innovative financial products to bring about fundamental and lasting improvements to our capital markets.
* Please refer to the attached PDF for details.