[비즈한국] Lee Chan-jin, Chairman of the Financial Supervisory Service (FSS), has caused a stir in the securities industry with his remarks regarding the overheating of single-stock leverage exchange-traded funds (ETFs) for Samsung Electronics005930 and SK Hynix000660. During a regular press briefing on the 22nd, Chairman Lee stated, "With trading turnover rates skyrocketing, market instability and volatility have intensified significantly," adding, "I regret that I didn't lie down in front of the door to stop it if I had to." In particular, he directly criticized securities firms, saying, "Only those skimming commissions in a gambling den make money, and this is resulting only in padding the pockets of brokerage houses."
The securities industry is pushing back, asking, "Are securities firms the easiest target?" The criticism is that after the financial authorities pushed for these products to capture capital leaking overseas—following President Lee Jae-myung's remarks on the "need for leverage products"—they are now "demonizing" the securities firms.
Financial authorities baffled by leverage ETF overheating
The introduction of single-stock leverage ETFs was aimed at lowering the high exchange rate. Financial authorities believed that the investment flow of so-called "Seohak Ants" (retail investors) into the US stock market (TQQQ, SOXL, etc.) was worsening the high exchange rate and the stagnation of the domestic stock market, so they pushed for 2x leverage ETFs and ETNs with the goal of locking that capital within Korea.
However, the assessment so far is that the effect has been "negligible." The exchange rate shows no signs of falling below 1,500 won. During the press conference, Chairman Lee also admitted, "It seems the effect of repatriating capital from Hong Kong (where similar products are listed) was not very good," adding, "On the other hand, the side effects have grown so large that the government is actually quite concerned." It is effectively an admission that the policy's effect is the complete opposite of what was expected.
Indeed, the side effects are significant. According to the FSS, the daily average trading turnover rate for the Samsung Electronics and SK Hynix single-stock leverage ETFs, which listed on the 27th of last month, reached 122.5%. On some days, it even hit 200%. Given that the annual turnover rate for typical stock-type ETFs is usually around 100%, this represents an extremely overheated state where an entire year's worth of trading occurs in just a single day.
In this process, the securities industry is estimated to earn approximately 5 to 10 trillion won in annual trading commissions. This is the background behind Chairman Lee's remarks about "only padding the pockets of brokerage houses."
"They told us to build it": Securities industry has much to say
However, there is considerable backlash from the securities industry. They argue that the financial authorities are demonizing brokers after leading the initiative to ease regulations on high-risk leverage products to lure the aggressive investment tendencies of domestic investors.
In particular, critics point out that the authorities rushed the policy without sufficiently consulting industry experts, and now that side effects are erupting, they are framing securities firms as "villains in a gambling den."
In fact, as of the end of last year, the balance of US stock-type leverage holdings by domestic investors stood at 23 trillion won, with Korean holdings accounting for 11% of the Nasdaq 3x ETF (TQQQ) and 25% of the semiconductor index 3x ETF (SOXL). Given that Korean investors have an "aggressive inclination," critics argue that more caution should have been exercised regarding leverage products.
Furthermore, critics argue that authorities should have considered that products tracking 2x the volatility of specific stocks like Samsung Electronics or SK Hynix would inevitably attract ultra-short-term trading and speculative funds, as asset values fluctuate sharply based on the daily performance of the underlying asset.
A securities industry official raised their voice, saying, "The government and financial authorities led the charge by saying we should create diverse products like in the US to attract investors. Now that the risks have materialized, is it a 'financial powerhouse' that the head of the financial authority presides over an emergency meeting after one week and publicly bashes securities firms?" They added, "If the government knew the tendencies of domestic investors but pushed this quickly for the purpose of exchange rate stability, it is a total policy failure by the government."
There is also significant criticism that one should not have expected individual funds leaked to single-stock leverage products for Samsung Electronics or SK Hynix to return to the domestic market. The argument is that domestic individual funds invested in similar products listed on the Hong Kong Stock Exchange last October amounted to only 500 billion to 1 trillion won, meaning it was never going to contribute significantly to exchange rate stabilization from the start.
Some even argue that the burden on securities firms has only increased. Since ETF and ETN trading has become more active, additional costs have increased. The tax burden for securities firms, including rural special taxes and education taxes, is also estimated to reach tens of billions of won annually. There are also taxes levied on large corporations based on transaction amounts related to gambling and education. Moreover, amid strong earnings for brokerages, concerns are quietly emerging that "windfall taxes could be imposed on securities firms as well."
Another securities industry official expressed concern: "Currently, the KOSPI has an abnormal structure where just two stocks, Samsung Electronics and SK Hynix, account for 60% of the total market capitalization. The problem is, after financial authorities pushed for these leverage products at such a time, if they blame the securities firms instead of the investors when a massive number of investors rush in, will the autonomy of product offerings for securities firms ever expand?"