South Korea's financial regulator is tightening the investment threshold for leveraged ETFs.
The new rules mandate that novice investors must complete a simulated trading exercise lasting at least five days and totaling five hours before they can purchase a single-leveraged ETF, further raising the barrier for retail investors to participate in high-risk, leveraged products.
On August 12, a report indicated that the Financial Services Commission (FSC) of South Korea issued a new regulation requiring new investors to complete a free simulated trading session on the Korea Exchange website before being allowed to buy single-leveraged ETFs. The new rule, set to take effect on August 19, will apply to both domestic and related foreign investment products.
This is the latest in a series of measures by South Korean regulators to tighten leveraged trading. Previously, authorities had already raised the minimum cash deposit requirement for a single-stock leveraged ETF to 30 million Korean won and extended the online training duration for new investors to three hours.
Trading volume has already dropped significantly. The impact of the regulatory tightening has become apparent. Since the cash deposit threshold was raised on July 31, the trading volume of single-stock leveraged ETFs has cooled markedly, plummeting from 12.4 trillion Korean won on July 30 to 700 billion Korean won by August 11, a decline of over 90% in just a few trading days.
In recent years, South Korean regulators have been limiting retail investors' access to high-risk products through measures such as capital thresholds, investor education, and simulated trading. Previously, individual investors looking to participate in derivatives trading and stock short-selling were also required to meet similar simulated trading requirements.
Extending the simulated trading mechanism to single-leveraged ETFs signifies that South Korea is gradually establishing an investor access system for high-risk leveraged products. Against the backdrop of significant volatility in related products, which has led to substantial investor losses, regulators are reducing the risk of a retail investor stampede into high-risk trading by raising the costs of participation and entry barriers.
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