Korea listed single-stock leveraged funds in May, stopped new ones in July, and from Friday a buyer needs 30 million won in cash

Thirty million won, in cash, and nothing else counts.

That is the account balance a retail investor in Korea will need from Friday to make a new or an additional purchase of a single-stock leveraged exchange-traded fund or exchange-traded note. The floor today is 10 million won, and today it can be met partly with securities.

The Financial Services Commission published the change on July 24. It is less a new rule than an early one. The 30 million won floor and the removal of substitute securities from the calculation were both settled on July 16, with the first step due around August 5 and the second around August 19, and the Commission has now pulled both forward to July 31, saying it did so to stabilise demand quickly. Firms that cannot build the systems in time will be recommended to suspend new transactions in the products altogether.

The definition of cash is where the rule does its work. Until Friday, 70 percent of the market value of substitute securities in an account, meaning shares, bonds and non-leveraged exchange-traded funds, counts toward the deposit alongside actual money. From Friday none of it does. Proceeds from a sale will be recognised only at settlement on T plus two, rather than at the moment the trade goes through, and an amount borrowed against sold securities will not be recognised at all. Securities firms also lose the leeway they had to lower the floor for customers with a trading record behind them, although they may still set it higher.

Nine weeks separate the launch of these products from the cash requirement. Korea permitted single-stock leveraged funds and notes to list domestically on May 27, having concluded that its own investors were otherwise buying Hong Kong listings of the same idea under weaker protections. Market value and turnover then rose fast against expectations of higher share prices at the global memory chipmakers, and on July 16 a joint meeting of the Ministry of Finance and Economy, the Commission, the Financial Supervisory Service and the Bank of Korea suspended new listings of such products, including inverse and covered call versions, and prohibited securities firms and asset managers from advertising or marketing the ones already trading. Both took effect that day.

The underlying shares explain the hurry. Fourteen single-stock leveraged products that listed at 20,000 won were trading between 10,635 won and 13,015 won by the fourth week of July, losses of between 34.93 percent and 46.83 percent against their listing price, reported by Shin Ji-min at the Seoul Economic Daily. The same report counted 41 sidecars on the KOSPI and 25 on the KOSDAQ so far this year, with one or the other triggering on every trading day from July 10.

Then came Tuesday. The KOSPI fell more than 10 percent in the Seoul session and a Level 1 circuit breaker halted the market for 20 minutes, as this site reported earlier today. Samsung Electronics and SK Hynix, the two names the Seoul Economic Daily counted those fourteen products against, fell further than the index did.

Two further pieces of the July 16 package are still ahead. Tighter management of premium and discount rates, and a streamlined process for putting a product on the investment watchlist, take effect on August 19 once the relevant rules are amended. A rise in the minimum trading lot for domestically listed single-stock leveraged products, from one share to 20, is scheduled for November, and the Commission says it will consider bringing that forward too.

This item is four days behind the announcement. It runs because the rule bites on Friday, because the site had covered the sidecars twice without covering the regulatory response to them, and because the market the rule was written for fell more than 10 percent on the morning this was published.