South Korean financial authorities are speeding up work on measures to address single-stock leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK Hynix. The authorities are continuing discussions while holding a series of meetings with the industry.

On July 13, the financial investment industry said Financial Supervisory Service Governor Lee Chan-jin (이찬진금융감독원장) met Korea Financial Investment Association Chairman Hwang Seong-yeop and the chief executives of 20 asset management companies at the association in Yeouido, Seoul, earlier in the day.

The open meeting mainly addressed asset managers' exercise of voting rights, internal controls, and false or exaggerated advertising for ETFs. Lee called for improving what he described as a "copy-and-paste" practice in voting-rights disclosures and said internal management systems should function effectively, including dedicated organisations, a stewardship committee and key performance indicators (KPIs).

On ETFs, he stressed the need to provide accurate investment information during ad production and internal review, and to work with securities firms acting as liquidity providers to manage the gap between market prices and net asset values.

The asset management industry also said it was necessary to voluntarily improve the practice of repeatedly launching similar products, often described as "copying products".

In closed-door discussions, the market impact of single-stock leveraged ETFs and investor protection measures were discussed broadly, the industry said.

The industry suggested gradually lowering leverage from the current 2 times to 1.5 times and limiting daily trading turnover to within 100 percent of investors' deposits. Raising entry requirements to a level comparable to professional investors was also mentioned.

Some small and mid-sized managers are reported to have urged tougher steps, citing a deepening concentration of funds into certain large-cap stocks and worsening volatility, including delisting single-stock leveraged ETFs.

Hwang said, "We need to carefully examine the phenomenon of funds concentrating in certain large-cap stocks and retail investors' leveraged investing increasing rapidly," stressing the need to strengthen systems to protect investors and stabilise markets.

The Financial Services Commission will also gather additional industry views. The FSC plans to hold closed-door talks on July 14, chaired by Vice Chairman Kwon Dae-young, with officials from the financial investment industry including major securities firms and asset managers to discuss measures for single-stock leveraged ETFs and capital market issues such as recent stock market volatility.

Financial authorities are reported to have asked the financial investment industry ahead of the meeting for measures to strengthen investor protection on its own. The agenda includes steps such as strengthening loss-risk disclosures for leveraged products and separately managing elderly investors or investors with high trading turnover.

Authorities are also considering raising the basic deposit, currently 10 million won, or setting investment limits. They are also reviewing stronger mandatory education and restrictions on listing new single-stock leveraged and inverse ETFs.

Joint discussions among relevant agencies are also expected to continue. The Ministry of Economy and Finance, the FSC, the FSS and the Bank of Korea are reported to be considering holding a macroeconomic and financial issues meeting, known as the F4 meeting, as early as July 16 to discuss the impact of single-stock leveraged ETFs on market volatility and possible responses.

Financial authorities are examining how much single-stock leveraged ETFs amplified existing volatility rather than concluding they were the sole cause of recent sharp swings in the stock market.

Short-term surges in major semiconductor stocks, profit-taking and changes in foreign investor flows have also been at work, so authorities are expected to decide the strength of measures after analysing market impacts and gathering industry opinions.

An industry official said, "It looks like working-level officials at the director-general level will attend the FSC meeting on July 14," adding, "It will likely be a forum to broadly gather views from the working-level officials directly responsible for products, going beyond the opinions of the CEOs who attended today's asset manager meeting and the measures discussed so far."