Watchdog Admits Hasty Approval of Risky Chip ETFs

The head of South Korea's market watchdog, Lee Chan-jin, governor of the Financial Supervisory Service (FSS), offered a rare apology, stating the regulator had been "hasty" in approving leveraged funds linked to prominent chip stocks. These funds, introduced last month and connected to Samsung Electronics and SK Hynix, have been identified as a factor in the heightened volatility within the KOSPI index. Policymakers had aimed to curb currency weakness by drawing retail investors back from U.S. markets through these products.

Lee expressed regret, noting the limited effect on currency weakness and concerns that system operators profit while individual investors do not. The FSS is contemplating stabilizing measures for these investment products. The watchdog recently issued an investor warning on the ETFs, which helped propel retail investors' borrowed equity investments to a record 60 trillion won ($39 billion) by the end of May. The KOSPI index has seen significant gains, driven by Samsung and SK Hynix, but remains without developed market status from MSCI due to volatility and structural issues.

Korea Exchange CEO Jeong Eun-bo indicated that local authorities would implement regulatory improvements for these investment products if necessary. Efforts are also underway to introduce similar leveraged ETFs tied to South Korean chip stocks in international markets like Hong Kong and London. The government is pursuing market reforms, including opening the currency market around the clock, to improve foreign access and achieve developed market status, although the FSS governor cited ongoing volatility as a reason for caution.