South Korea Tightens Regulation: New Leverage ETF Investors Must Complete Simulated Trading Starting August 19

South Korea's financial regulatory body has announced that, to strengthen retail investor protection and address market volatility caused by high-risk financial products, new retail investors wishing to trade individual stock leveraged ETFs and exchange-traded notes (ETNs) must complete a mandatory simulated trading program starting August 19, 2023.

According to regulations set by the Korea Exchange (KRX) and the Financial Services Commission (FSC), new retail investors must complete at least five trading days of simulated trading on a free system provided by KRX. Each day requires a minimum of one hour of operation, with a total simulation time exceeding five hours. This requirement applies to all individual stock leveraged products listed both domestically in South Korea and overseas. After completion, investors must register proof with their securities company and obtain approval before engaging in real trading.

Professional investors, institutional investors, and foreign individuals are exempt from this requirement. Additionally, investors who have trading records in these products between May 27 and August 18, 2023, are also exempt from the simulated trading obligation.

This measure is part of the South Korean government's broader initiative to strengthen the high-risk investment environment. Prior to this, authorities raised the minimum margin requirement from 10 million KRW to 30 million KRW in cash on July 31, and no longer accept 'substitute securities' as margin collateral.

Data shows that after the margin increase, the daily trading volume of these products dropped significantly from 12.4 trillion KRW on July 30 to 700 billion KRW on August 11.

In addition to the simulated trading requirement, authorities have tightened the premium/discount management standards for ETFs and ETNs. The deviation limit for domestic products has been reduced from 3% to 2%, while for overseas products, it has been lowered from 6% to 5%. The FSC stated that these measures aim to ensure investors clearly understand the risks of leveraged products before entering the market, preventing significant losses from blind speculation.