Korea Cut Leveraged ETF Trading by 94%. Now Investors Face a Five-Day Test

South Korea today (Wednesday) said new retail investors must complete five trading days of simulated practice before buying single-stock leveraged products. The announcement follows a 94% drop in daily turnover after authorities raised the minimum cash requirement.

From August 19, the rules will cover domestic and overseas-listed leveraged and inverse exchange-traded funds (ETFs) and exchange-traded notes (ETNs).

Securities firms must verify three conditions before opening access: KRW 30 million in cash, three hours of prior education and completion of the Korea Exchange (KRX) simulation.

The simulation is designed to show how daily-reset products can lose value through negative compounding. Leveraged funds are generally intended for experienced investors who understand that risk, as a FinanceMagnates.com ETF guide explains.

Five Sessions Before the First Trade

The Financial Services Commission (FSC) set the schedule. Each session must last at least one hour. The days need not be consecutive, and investors can use the free service through the exchange Exchange An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv Read this Term's website.

The education requirement is separate. It totals three hours, including a two-hour advanced course. Investors must also keep the KRW 30 million minimum entirely in cash when making a new or additional purchase.

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Stocks, bonds and other securities no longer count toward that balance. Cash from a securities sale is recognized only after settlement Settlement Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2 Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2 Read this Term at T+2, and loans secured against sold assets are excluded.

The FSC said the simulation should expose investors to features such as negative compounding before they use real money. The regulator already uses mock trading for new futures, options and short-selling participants.

Cash Rule Cuts Turnover by 94%

The deposit threshold has already changed trading behavior. Daily turnover fell from KRW 12.4 trillion, about $8.4 billion, on July 30 to KRW 700 billion on August 11, according to the FSC.

Turnover fell 94.35%. The products also recorded KRW 1.4 trillion of net redemptions between August 4 and August 10.

The threshold rose from KRW 10 million to KRW 30 million on July 31. Authorities also stopped brokerages from lowering the amount for experienced clients, a discretion firms previously received after three months of trading.

Demand had built quickly after Korea introduced the products on May 27. Korea Capital Market Institute research estimated that retail investors made about KRW 8.2 trillion of net purchases in leveraged funds through June 19, most of them tied to Samsung Electronics and SK Hynix.

The concentration mattered because the funds rebalance daily in the same underlying chip stocks. Reuters reported in July that Samsung Electronics, SK Hynix and their leveraged products accounted for more than 80% of KOSPI trading volume on some days.

Price Controls Tighten Across the ETF Market

The August 19 package also changes how liquidity providers manage gaps between an ETF or ETN's market price and the value of its assets. For domestically listed products, the permitted premium or discount threshold falls to 2% from 3%.

For overseas-listed products, the threshold drops to 5% from 6%. Unlike the simulation, these controls apply across the ETF and ETN market, not only to single-stock leveraged products.

KRX is preparing rules that could prevent liquidity providers from taking on new products if they intentionally or repeatedly breach the pricing duty. It will also shorten the process for placing a product on the investment watchlist from three stages to two.

Retail leverage is expanding in other markets at the same time. In July, Bitpanda introduced margin trading on more than 875 stocks, ETFs and commodities for European users, with exposure of up to 20 times capital.

Further Limits Remain Under Review

Korean authorities suspended new single-stock product listings and related advertising on July 16. They are also considering a cap that could restrict an individual's holdings of the products to 20% of financial investment assets, but Wednesday's decision did not implement that proposal.

A separate plan would increase the minimum domestic trading lot from one share to 20 shares. The FSC originally targeted November and has said it may bring the date forward, but has not announced a revised timetable.

Korea allowed single-stock ETFs and ETNs in April to reduce the regulatory gap with overseas markets. The eligibility criteria restrict the first domestic generation to large, liquid companies such as Samsung Electronics and SK Hynix.