South Korea’s financial regulator has vowed to gain control over the country’s overheated exchange-traded funds, even at the cost of a temporary market contraction.

The Financial Services Commission has recently unveiled a road map to normalize exchange-traded funds and exchange-traded notes, bolstering the mandatory education of brokerages and the minimum deposits of investors.

“Short-term adjustments are inevitable in order to normalize the currently excessive speculative demands,” the Financial Services Commission said.

The remark came in answer to the concern that the latest regulation may further dampen the financial market that is already struggling amid the COVID-19 pandemic.

An ETF refers to an investment fund traded on stock exchanges, which can hold assets such as stocks, commodities, or bonds, while an ETN is typically issued by financial institutions and held to maturity, with its return based on a market index.

Responding to the coronavirus pandemic and market depreciation, retail investors have been flocking to purchase discounted local and foreign stocks, especially in the wake of global oil price dips in March, according to the FSC.

The number of ETF and ETN accounts increased to nearly 800,000 and 240,000 respectively in April, compared to some 270,000 and 30,000 in January.

To further reduce speculative demand for exchange-traded products, the financial authorities will allow stock firms in Korea to merge ETN stocks to decrease the total number of shares, which raises their market price.

In addition, under the FSC’s new measures, local brokerage houses are obliged to control ETNs’ disparate ratio -- the difference between the funds’ market value and the net asset value underlying them. By allowing them to liquidate some ETN shares with high disparate ratio as part of efforts to prevent investor losses, the FSC will seek to ensure an adequate return on investment.

Meanwhile, the financial regulator will step up efforts to diversify related investment products in order to spread individual investors’ excessive focus on certain types of exchange-traded shares. As of 2020, transactions of ETN products in the raw materials sector, including crude oil and gold accounted for 97.1 percent of the total, the FSC data showed.

“We are planning to ease restrictions faced by local securities firms when launching new ETN products and allow such stocks to be listed on Korean markets’ composite benchmark index like Kosdaq 150 as well as the KRX 300,” an official of the FSC said.

“The plans that can be implemented by merely changing the Korea Exchange’s operating rules and regulations will be put in place in July at the earliest, whereas those of which require a revision of related legislation are scheduled to be carried out later in September.”

By Choi Jae-hee (cjh@heraldcorp.com)