South Korea is implementing a temporary suspension on new listings of single-stock leveraged exchange-traded funds (ETFs) to curb market volatility. This action follows a surge in popularity of funds linked to Samsung Electronics and SK Hynix, which has contributed to significant market swings.

The Financial Services Commission (FSC) announced in a statement on Thursday that the ban will remain in effect until market conditions stabilize. Additionally, regulators will increase the minimum margin requirement for trading leveraged ETFs from 10 million won to 30 million won (approximately $20,300), with the new rule expected to take effect on August 5.

These measures represent the most comprehensive effort to date by South Korean authorities to cool a retail trading craze. This frenzy has transformed the country's $4.1 trillion stock market into one of the world's hottest and most volatile. The new rules were announced following a meeting involving regulators, finance ministry officials, and the central bank governor, amid growing concerns that leveraged ETFs tied to Samsung and SK Hynix are fueling excessive market turbulence.

FSC Chairman Byun Je-Ho stated late Thursday, "We initially introduced these products domestically as they grew rapidly overseas, and we judged it necessary for local investment to enhance the appeal of Korea’s capital market. However, stock market volatility has increased since then."

These products, along with the two chipmakers they track, have become immensely popular, attracting substantial retail investment and now accounting for over 70% of trading volume. Conversely, foreign investors have grown increasingly cautious, selling over $100 billion worth of local stocks this year alone.

On Thursday, the benchmark Kospi index fell 6.4%, with shares of Samsung and SK Hynix each plunging more than 8%. Since its June peak, the index has tumbled over 25%. Volatility has surged concurrently, with the 30-day volatility measure reaching unprecedented levels and daily moves of 5% or more becoming increasingly common.

While stricter rules may dampen participation, some market participants suggest this trade-off could be worthwhile. Jason Minsang Kam, head of active equity management at Seoul-based Kyobo Life Insurance, noted that the measures are "highly likely to limit retail investors' access to leveraged ETFs to some extent." He added, "From the perspective of retail investors, these tightening requirements are expected to have a positive effect in easing short-term volatility."

Further Adjustments to Curb KOSPI Volatility

As part of the adjustments, regulators will also increase the mandatory training requirement for leveraged ETF investors from two hours to three hours and raise the minimum trading unit from 1 unit to 20 units.

Authorities will further tighten controls on the premium or discount between an ETF's market price and its net asset value, requiring liquidity providers to keep the gap within 2%, down from the current 3%.

The FSC indicated that the higher margin ratio will also apply to overseas-listed leveraged ETFs, a move intended to prevent investors from shifting to offshore assets. The commission added that it may consider further measures if the market fails to stabilize.

Concerns over the volatility in South Korea's stock market appear to have reached the highest levels of government. President Yoon Suk Yeol remarked on Wednesday that the market had become "quite unstable" following an unprecedented rally and urged regulators to prepare follow-up measures.

Persistent ETF Demand Amid Regulatory Action

Even as regulators act to curb speculative trading and investor concerns grow over lofty valuations and concentration risks within the artificial intelligence (AI) boom, there are few signs of waning demand. Investors continue to pour money into products linked to the theme, seeking new ways to profit from one of the strongest equity rallies in recent history.

On Thursday, the top 10 most actively traded securities by volume on the Korea Exchange were all leveraged or inverse ETFs linked to indices or the aforementioned chip giants. Data shows that the prices of about a dozen South Korean leveraged ETFs tracking Samsung and SK Hynix have plunged roughly 40% since their debut approximately two months ago.

Despite this, investors continue to inject funds into these products. Their assets under management peaked at over $10 billion in June.

Rebecca Sin, an ETF analyst at BI, suggested the measures may help slow the products' rampant growth but do not address the root cause: investors' strong appetite for AI exposure. She stated, "Recent market activity suggests many investors continue to focus on potential upside even in the face of significant volatility and losses. The willingness to 'buy the dip' despite sharp pullbacks highlights the firm conviction surrounding these themes."