South Korea’s financial regulator has introduced a series of measures intended to mitigate risks associated with single-stock leveraged exchange-traded funds (ETFs) amid significant market volatility. The Financial Services Commission announced steps aimed at stabilizing the local stock market, which has experienced sharp fluctuations partly driven by individual investors using debt to capitalize on surging artificial intelligence-related stocks.
The regulatory actions include suspending the approval of new single-stock leveraged ETF listings, prohibiting securities firms and asset managers from advertising or promoting these products, and increasing the minimum cash collateral required for new investments to 30 million won (approximately $20,000), a threefold rise from previous requirements. These efforts are designed to discourage speculative trading and limit exposure to highly leveraged investment vehicles.
Most of the affected ETFs, which were introduced in May, focus on the performance of major memory-chip companies such as Samsung Electronics and SK Hynix. These two firms collectively represent nearly half of the benchmark Kospi index's market capitalization. The Kospi suffered a 6.4% decline on Thursday, pushing it back into bear-market territory after a cumulative drop of roughly 27% from its peak in June. Despite the recent losses, the index remains up 62% year to date.
Shares of Samsung Electronics and SK Hynix were particularly hard hit, falling 8.8% and 12%, respectively, on the day of the selloff. Nevertheless, Samsung's stock price has more than doubled and SK Hynix's has nearly tripled over the course of the year. The leveraged ETFs in question aim to magnify daily movements of the underlying stocks by a factor of two. Experts suggest that the necessary daily rebalancing of these funds can intensify market volatility, creating feedback loops that exacerbate price swings.
Herald van der Linde, HSBC’s head of equity strategy for Asia Pacific, pointed to the rising influence of retail investors as a risk factor contributing to the market's instability. The measures introduced by South Korea's Financial Services Commission reflect growing concerns about the impact of leveraged products on market dynamics, particularly in sectors closely tied to emerging technologies and growth narratives such as artificial intelligence.