Korea Exchange faces industry pushback over including exchange-traded funds in after-market trading hours scheduled to begin next month on the 14th. Asset management firms and securities companies serving as ETF liquidity providers expressed reluctance to participate following recent volatility in single-stock leveraged products. The exchange requested each asset manager submit lists of ETFs available for after-market trading by the 7th. An emergency meeting held last month at the Korea Financial Investment Association reached consensus that ETF after-market trading should be delayed. The Financial Services Commission tightened tracking error requirements for all ETFs to 2% for domestic and 5% for overseas products, effective the 19th of this month, with violations potentially resulting in business restrictions.
Asset Managers and Securities Firms Cite Volatility Management Concerns
Financial industry participants expressed concerns about volatility management and potential regulatory penalties in after-market sessions. A financial investment industry official stated that securities and asset management firms do not share the exchange's apparent determination to proceed with after-market operations. The official said opinions gathered at last month's industry representative meeting favored waiting until market stabilization before starting ETF trading rather than following the exchange's timetable.
Industry sources identified tracking error management as the primary concern. Current regular trading sessions already experience issues with LP rebalancing processes sharply increasing tracking errors near market close. A large asset management firm official said the industry lacks capacity to manage volatile products like single-stock leveraged ETFs while simultaneously participating in after-market trading. The official characterized simultaneous launch of general stock and ETF trading as premature given incomplete systems for the new framework.
Another asset management firm official questioned whether after-market sessions could maintain tracking error control when regular sessions already experienced difficulties managing ETF tracking errors. The official noted that while everyone understood policy introduction intentions, actual outcomes exceeded expectations, referencing the single-stock leveraged ETF experience.
Financial Services Commission Tightens Tracking Error Requirements
The Financial Services Commission adjusted mandatory tracking error standards for all ETFs managed by liquidity providers. The new requirements set limits at 2% for domestic underlying assets and 5% for overseas assets, down from previous standards of 3% domestic and 6% overseas. The policy takes effect the 19th of this month.
Securities firms face LP business restrictions for violations involving intent or gross negligence in tracking error management obligations. Asset management firms face restrictions on new ETF launches under the same violation conditions. The regulatory tightening follows disruptions in single-stock leveraged ETF markets.
Korea Exchange Maintains Launch Schedule Pending ETF List Review
Liquidity provider participation requirements for after-market ETF trading emerged as an issue when Korea Exchange first announced trading hour extension plans in January. The exchange initially proposed voluntary LP participation and allowed ETF trading without LPs present. Market criticism about abandoning oversight led the exchange to reverse course after two months and mandate LP participation.
An exchange official stated that no changes occurred to the trading hour extension schedule as of now. The official said additional decisions regarding whether to allow ETF trading in after-market sessions would follow review of LP-eligible ETF lists submitted by asset managers.
FAQ
Q: When did Korea Exchange request ETF lists from asset managers for after-market trading?
A: Korea Exchange requested each asset manager submit lists of ETFs available for after-market trading by the 7th, according to financial investment industry sources.
Q: What tracking error requirements did the Financial Services Commission set for ETF liquidity providers?
A: The Financial Services Commission set tracking error limits at 2% for domestic underlying assets and 5% for overseas assets, effective the 19th of this month. Previous standards were 3% for domestic and 6% for overseas assets.
