South Korea's financial authorities are speeding up efforts to draw up measures for single-stock leveraged exchange-traded funds (ETFs) ahead of a presidential briefing on July 15, but are struggling due to a lack of clear solutions.

The Financial Services Commission, the Financial Supervisory Service and the Bank of Korea held a working-level meeting on single-stock leveraged ETFs at the Government Complex Seoul on July 14, the financial investment industry said. They discussed market impact and directions for improvement. The FSC is also gathering opinions from brokerages, asset managers and capital market experts.

The Korea Financial Investment Association also urgently convened chief executives of 10 major comprehensive financial investment firms on the day. Financial authorities earlier asked brokerages to submit investor protection measures and asset managers to submit ways to reduce product volatility, it was reported.

The financial investment industry expects the outline of supplementary measures to emerge after the FSC's presidential briefing on July 15 and the Bank of Korea's Monetary Policy Board meeting on July 16, followed by a market monitoring meeting (F4) involving the Ministry of Economy and Finance, the FSC, the FSS and the Bank of Korea.

Goldman Sachs recently analysed that during the KOSPI's sharp fall, mechanical selling caused by deleveraging in single-stock leveraged ETFs amplified intraday volatility. It estimated that 62 percent of net selling by domestic institutions came from ETF-related liquidation volume.

Views within the financial authorities reportedly differ over whether single-stock leveraged ETFs are a main cause of recent stock market volatility. With multiple factors acting at the same time, including foreign programme selling, portfolio adjustments by institutions and concentration in large semiconductor stocks, it is difficult to conclude that leveraged ETFs alone caused the plunge, the report said.

On the other hand, some analysis says sharp swings in the KOSPI index have become more frequent since leveraged products were launched. According to NH Investment & Securities, the KOSPI moved by more than 3 percent on 26 of 96 trading days before the launch, but after the launch that rose to 17 of 33 trading days through July 13.

Pressure from politicians is also growing. The People Power Party said single-stock leveraged ETFs made the domestic stock market unstable and demanded the dismissal of Kim Yong-beom, head of the presidential office policy division, who it said led the introduction of the products. For financial authorities ahead of the presidential briefing, the burden has grown to present measures for market stability and investor protection.

However, strong measures such as delisting are seen as unlikely to be realistic. If products that have already attracted large inflows from retail investors are liquidated in a short period, losses and confusion could worsen.

If products allowed through regulatory overhaul are forced out about two months after launch, controversy over policy credibility would also be unavoidable. Financial authorities reviewed the possibility of delisting but judged it impractical, it was reported.

If only the investment threshold for domestic products is raised, financial authorities also need to consider the possibility that investment funds could move to overseas leveraged products.

The Hong Kong stock exchange has products trading that track twice the daily return of Samsung Electronics and SK Hynix. In the United States, an ETF was launched that tracks twice the daily return based on SK Hynix American depositary receipts (ADRs).

One reason single-stock leveraged ETFs were allowed domestically was to absorb in the local market investment demand that had moved overseas.

In January, the FSC said related products exist overseas but regulations prevent domestic launches, leaving investment demand unmet, and announced its policy to allow single-stock leveraged ETFs.

If domestic regulations are tightened too much, investors could buy similar products through overseas accounts as they did before the system was introduced.

As a result, financial authorities are more likely to supplement investor entry requirements rather than impose a full ban, including raising minimum deposit requirements, strengthening pre-education, expanding risk disclosures and restricting overheated marketing. They could also discuss ways to closely monitor rebalancing 규모 and the impact of trading in underlying stocks when market volatility increases.

Financial Supervisory Service Governor Lee Chan-jin (이찬진) was also reported to have said of single-stock leveraged ETFs that it is not an issue that can be settled at once in the current phase and is an area that needs to be monitored, revised and supplemented continuously.

Financial authorities are expected to put more weight on step-by-step strengthening of investor protection than sweeping regulation, as they need to reduce volatility in the domestic stock market while also preventing funds from moving to overseas products.