FSC chief reported to prosecutors over single-stock leveraged ETF launch
Former Seoul council member Lee Jong-bae filed a complaint against Lee Eog-weon, claiming that high-risk single-stock leveraged ETFs were introduced without proper stress testing.
Financial Services Commission (FSC) Chairman Lee Eog-weon speaks during a conference held at the National Assembly in Yeongdeungpo District, western Seoul, on July 29.NEWS1
2x leveraged ETFs and negative compounding
With a 2x leveraged exchange-traded fund, the price movement is doubled, which can result in losses even if a stock rises and then falls back to the original price.
How does this happen?
If a stock rises in value and then drops back to the original price, the share loses less by percentage as it falls.
For twice-leveraged stocks, however, losses are doubled, meaning that the share price may fall below the original value.
Regular 2x leveraged
Price $100 $100
Rise $130 (+30%) $160 (+60%)
Fall $100 (-23.1%) $86.08 (-46.2%)
Actual returns may differ based on the decimal places used to calculate gains and losses.
Lee Eog-weon, chairman of the Financial Services Commission (FSC), has been reported to prosecutors over the introduction of single-stock leveraged exchange-traded funds (ETF), which critics say contributed to heightened market volatility.
Single-stock leveraged ETFs are high-risk exchange-traded funds designed to deliver twice the daily return of a single stock, such as Samsung Electronics or SK hynix. Unlike conventional ETFs, which typically track a basket of stocks or a market index, these products amplify both gains and losses, making them significantly more volatile.
Former Seoul Metropolitan Council member Lee Jong-bae said Thursday that he filed the complaint with the Supreme Prosecutors' Office through the Anti-Corruption & Civil Rights Commission. The complaint accuses Lee of dereliction of duty and abuse of authority resulting in the obstruction of the exercise of rights.
“There’s a possibility that Chairman Lee may have instructed officials not to conduct a stress test,” said Lee Jong-bae. “If a stress test was conducted, a thorough assessment could have produced serious results that would have made it difficult to introduce the products just before the election.”
A stress test is a risk assessment method that evaluates how financial products would perform under extreme market conditions, such as a sharp decline in stock prices.
Lee Jong-baecited an FSC document submitted to Rep. Park Sung-hoon of the People Power Party, stating that the commission had neither conducted nor commissioned any stress tests related to single-stock leveraged ETFs.
He further argued that the omission ran counter to the purpose of the Act on the Establishment of the Financial Services Commission, which states that the commission exists to protect investors and promote the stability of financial markets.
Funeral wreaths calling for the delisting of single-stock leveraged exchange-traded funds stand near the main gate of the National Assembly in Yeongdeungpo District, western Seoul, on July 29.YONHAP
Lee also asked prosecutors to investigate Kim Yong-beom, presidential chief of staff for policy, as an alleged accomplice.
“If Chairman Lee [Eog-weon] ordered officials not to conduct stress tests at Kim's direction, it could constitute abuse of authority resulting in the obstruction of the exercise of rights,” he said.
Earlier, LeeJong-baeseparately filed a complaint against Kim, alleging abuse of authority, coercion and business interference, claiming that “financial authorities would not have rushed to introduce single-stock leveraged ETFs, which were expected to cause severe side effects, shortly before the election without Kim's instructions.”
Lee Eog-weon has also been reported to police over similar allegations.
A civic group that advocates for consumer rights and public-interest issues filed a complaint with the Seoul Metropolitan Police Agency on Monday against Chairman Lee, Kim Yong-beom, President Lee Jae Myung and Financial Supervisory Service Gov. Lee Chan-jin on allegations of abuse of authority resulting in the obstruction of the exercise of rights.
Financial authorities introduced single-stock ETFs backed by leading Korean stocks to reduce what they described as regulatory asymmetry between domestic and overseas markets. On May 27, one week before the June 3 local elections, 16 leveraged and inverse ETFs linked to Samsung Electronics and SK hynix debutedon the domestic market.
BY HAN YOUNG-HYE [shin.woojin@joongang.co.kr]
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
