The cost for global investors to place leveraged bets on SK hynix's Korea-listed shares has fallen by more than half in recent weeks, a shift that comes after the memory chip giant's US listing and a brutal selloff in artificial intelligence-related equities. According to people familiar with the matter, major banks including Bank of America, Citigroup, Goldman Sachs and JPMorgan are now quoting clients spreads of roughly 150 to 300 basis points over the secured overnight financing rate for swaps providing exposure to the shares, the people said, asking not to be identified because the information is private. In mid-June, by contrast, some banks were asking clients opening or renewing SK hynix swap contracts for spreads of more than 1,000 basis points over SOFR, which has hovered between 3.50% and 3.69% since May 1.

Previously, banks imposed strict quotas on their capacity to take on additional SK hynix swap trades, charging hefty premiums and at times outright rejecting client requests. That backdrop came as an AI-driven rally sent SK hynix's Korea-listed shares up more than tenfold in the 12 months through June 22. With market sentiment extremely bullish, banks grew worried that heavy portfolio concentration in such a stock would pressure their funding costs in the repo market. Now, the people said, banks that had turned away clients are actively seeking business again, a sign that concerns over concentration risk have eased notably in recent weeks.

Shifting supply and demand dynamics have driven the trend: on the supply side, SK hynix's issuance of American depositary receipts last month gave investors a new avenue to bet on the chipmaker's upside; on the demand side, a sharp July slide in technology stocks has unwound some leveraged positions. A recent Bank of America survey of fund managers in Asia excluding Japan showed investors rotating from technology and cyclical stocks into more defensive sectors. Representatives for Bank of America, Citigroup, Goldman Sachs and JPMorgan declined to comment.

Such swap transactions give fund managers the economic benefits of owning the underlying stock without actually holding it. Funds betting on markets such as South Korea, China and India typically prefer swaps over direct share ownership due to capital controls, tax considerations, anonymity and built-in leverage. The frenzy for AI-related returns had stretched banks' capacity to write new SK hynix swaps, with a relatively smaller impact on Samsung Electronics and TSMC. However, the market turned sharply in July as investor panic over AI stocks triggered a global selloff. Compiled data shows South Korea's benchmark KOSPI index plunged 22% last month, its steepest monthly decline since October 2008, with SK hynix and Samsung Electronics together accounting for nearly half of the index's weight.

The Hong Kong-listed CSOP SK hynix leveraged ETF saw its assets tumble to below $5 billion by Tuesday, down more than two-thirds from June 25. The product initially used swap contracts to deliver twice the daily return of SK hynix's Korea-listed shares, but now allows a floating daily leverage multiple, capped at two times. Leveraged single-stock ETFs are often criticized for amplifying individual stock volatility due to their daily rebalancing. South Korean regulators have introduced measures to restrict retail trading of locally listed leveraged single-stock ETFs in an effort to reduce market swings.