Exchange seeks to verify whether firms have finalized decisions not to participate and assess demand changes after suspending applications
The Korea Exchange will urgently convene officials overseeing exchange-traded funds and exchange-traded notes from major asset managers and securities firms next week to reassess demand for after-market trading, after the exchange and financial regulators put the application process on hold amid continued market volatility.
According to financial industry sources Friday, the KRX will gather major asset managers and securities firms on Monday to discuss plans for operating the after-market.
The meeting is aimed at determining whether asset managers have actually finalized their decisions not to participate. The KRX also plans to use the meeting to reassess changes in demand and gather industry feedback on the launch plan.
"We want to confirm whether asset managers have actually finalized their internal decisions not to participate and how demand has changed," a KRX official said. "Although there have been discussions among firms about not participating, we want to hear directly from the industry and gather feedback in one place."
He added, “As operational concerns raised previously, including the calculation of indicative net asset value, creation and redemption, and termination, have resurfaced, we plan to hear industry feedback and assess whether any areas need improvement.
The KRX initially asked asset managers to submit a list of ETFs they wanted to trade in the after-market, but suspended the process as market volatility intensified in consultation with financial regulators. Single-stock leveraged ETFs, which have been at the center of recent market concerns, will be excluded from after-market trading.
KRX keeps after-market plan alive despite suspension
The KRX had planned to launch the after-market on Sept. 14, allowing ETF trading from 4 p.m. to 8 p.m. after regular trading closes.
The move was driven partly by competition from the 24-hour cryptocurrency market and Nextrade, an alternative trading system that has yet to begin ETF trading. The KRX was expected to be the only venue offering ETF and ETN after-market trading until Nextrade entered the market.
Although participation was voluntary, the KRX expected major asset managers to join given potential revenue opportunities and competition for market share. However, continued volatility following sharp swings in July changed the industry’s stance.
The Financial Services Commission moved ahead of schedule to tighten rules on single-stock leveraged products, raising the minimum deposit requirement from 10 million won ($7,000) to 30 million won and excluding substitute securities, including stocks, ETFs and bonds, from deposit calculations.
With demand-curbing measures introduced only about two months after the launch of single-stock leveraged ETFs, extending ETF trading hours raised concerns over conflicting policy signals and the risk of increased turnover and speculative demand.
Asset managers raise infrastructure concerns
Asset managers reached an informal consensus late last month that they would not apply for after-market trading, citing concerns over market volatility and competition, according to industry sources.
They have also raised concerns over infrastructure, including difficulties calculating asset values, less competitive liquidity-provider quotes, and insufficient systems for creation, redemption and termination.
The ETF market has also contracted. Total net assets of domestic ETFs fell to 434.615 trillion won at the end of July, down 15.2 percent from the previous month. The market fell below the 500 trillion won mark after holding above that level for two consecutive months.
An industry official said that if the KRX confirms plans to proceed with its after-market trading plans, some asset managers could wait to see which firms participate before following suit.
"Given the competitive pressure among asset managers, there is a possibility that most firms will eventually participate after all," the official said.
By Choi Yeon-jae (ch0221@heraldcorp.com)
