Weekly options on local stocks and ETFs and minimum deposits for overseas leveraged products are among the key reforms.

South Korea's Financial Services Commission (FSC) is revamping its exchange-traded product rulebook, opening the door to single-stock leveraged exchange-traded funds (ETFs) tracking domestic blue-chip stocks as it looks to sharpen the local market's competitiveness. 

The proposed changes mark a significant shift from the current framework, which requires ETFs to track at least 10 stocks and ETNs at least five

In a notice issued on Friday (30 January), the regulator said the revised enforcement ordinances will allow leveraged exposure of up to two times, up or down, to individual stocks for these ETFs. The leverage cap will apply to both ETFs and exchange-traded notes (ETNs), with investor protection cited as the key rationale for the limit.

The proposed changes mark a significant shift from the current framework, which requires ETFs to track at least 10 stocks and ETNs at least five, with each constituent capped at 30% of the portfolio. Under the new rules, those diversification requirements would be relaxed, clearing the way for fully concentrated, single-name products.

The FSC said the rule revisions are expected to be finalised in the second quarter of this year, potentially paving the way for a new wave of leveraged exchange-traded products. 

The regulator also plans to expand domestic index and stock options offerings, including introducing new weekly options based on individual domestic stocks and monthly maturities and weekly options based on domestic investment ETFs. It will also extend the maturities of weekly options based on the Kospi 200 and Kosdaq 150 to five days per week from the current two-day schedule.

The move also responds to investors’ growing demand for dividend ETF products like covered calls that secure regular dividends, but with limited target products and maturities for index and stock options, resulting in 71% of domestic covered call ETFs being based on US assets, the regulator noted.

The FSC expected to complete the revision in the first half of the year, with new options products listed thereafter.

The latest ETF regulatory development comes a month after the country’s authorities introduced tighter rules requiring mandatory education and mock trading for retail investors seeking to access high-risk overseas derivatives, including leveraged ETFs and ETNs.

Tighter requirements

Currently, investors invest in domestically and internationally listed leveraged ETFs and ETNs must complete a one-hour pre-training session.

Under the new enforcement, the FSC said that investors who invest in the newly introduced single-stock leveraged ETFs and ETNs will need to complete an additional one-hour in-depth pre-training session.

With the introduction of single-stock leveraged products, the term ‘ETF’ will be restricted in use to avoid investors mistaking these products for diversified investments. The product will be required to indicate these as ‘single-stock,’ according to the FSC.

A minimum deposit requirement of KRW10m (US$6,942) for investing in both domestic-listed and overseas-listed leveraged ETFs and ETNs will also be introduced under the new rules, the regulator noted.

The update on the overseas-listed products, which applies to new investors, looks to bridge ‘a regulatory gap’ as there’s no minimum deposit requirement currently in place for overseas-listed leveraged products, said the regulator.

Meanwhile, it is also looking to introduce a fully active ETF without an index linkage requirement, loosening the current rule that requires it to be linked to prices or indices as listed index collective investment vehicles.

‘There have been concerns that domestic investment demand for diverse ETFs is not being met domestically due to the application of relaxed regulations to overseas ETFs, such as those in the US, compared to those applied to domestically listed ETFs,’ the FSC stated.

‘We plan to improve relevant systems to enhance the attractiveness of our capital markets by ensuring global regulatory consistency, while also strengthening investor protection and convenience to mitigate capital outflows,’ it added.

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