The Financial Supervisory Service has begun checks to support the healthy development of the exchange-traded fund (ETF) market as volatility in South Korea's stock market has intensified recently due to geopolitical risks.

On March 24, the watchdog held a meeting at the Financial Investment Association in Seoul's Yeouido district with major ETF managers, liquidity provider (LP) brokerages and association officials to discuss measures to improve stability in the ETF market.

The meeting was arranged to manage ETFs so they do not amplify market volatility, as uncertainty has risen with worries over a prolonged war in the Middle East, the KOSPI plunging to the 5,400 level and the exchange rate breaking above 1,510 won.

The watchdog pointed out that in some stocks, rebalancing trades have recently been concentrated during the closing call auction, leading to sharp swings in share prices.

It analyzed that unintended market shocks are occurring in the process of adding large positions in thinly traded stocks or adjusting their weightings.

It therefore called on the asset management industry to strengthen advance analysis of the impact of rebalancing trades and to improve work processes to prevent trades from piling up at specific times during the session.

It also conveyed concern that for products with structurally high volatility such as leveraged ETFs, rebalancing could further amplify index volatility. It urged broad efforts to prevent market shocks, including changing portfolio adjustment methods if necessary.

It also signaled it could review possible institutional improvements regarding advance disclosure of portfolio composition files (PDFs) for a Kosdaq active ETF, which has recently become controversial.

The watchdog said, "Advance disclosure of portfolios encourages copycat trading by retail investors and could be misused for unfair trading." It said it would consult with related agencies to find ways to minimize side effects.

It also urged caution over marketing activities that cause market confusion, such as excessive competition to cut fees to expand market share.

The watchdog also discussed measures to introduce new products aimed at resolving asymmetric regulations at home and abroad and expanding autonomy in management.

The aim is to improve the regulatory environment so managers can design creative products while expanding investor choice.

A financial authorities official stressed, "As ETFs have established themselves as a core investment instrument in the capital market, their influence on the market has become very large," and added, "The higher external uncertainty is, the more asset managers and brokerages should act responsibly to support market stability and investor protection."