In response to this year's significant surge in global semiconductor stocks, which has sparked concerns over a potential market correction, several major international banks are now tightening the leverage available to hedge funds for bets on leading Asian chipmakers, including SK Hynix Inc. and Samsung Electronics Co., Ltd. (SSNLF).

Sources indicate that prime brokers such as Citigroup, JPMorgan Chase & Co., and Goldman Sachs Group Inc. have increased the financing costs for hedge funds seeking to take bullish positions on SK Hynix and Samsung via swap transactions.

These institutions have also implemented stricter limits on the size of new trades and are more selectively choosing their counterparties.

Similar measures have reportedly been applied to trades involving Taiwan Semiconductor Manufacturing Company Limited (TSM).

According to insiders, Morgan Stanley has declined new swap requests from clients for these two Korean stocks, while several second-tier banks have stopped accepting new orders over the past two weeks.

The few major global banks still willing to facilitate such trades are now reviewing each request on a case-by-case basis.

These actions coincide with an extreme, one-sided rally in the shares of these chipmakers this year, a global tech stock frenzy that is raising alarms about a potential bubble.

Shares of SK Hynix have more than tripled in value this year, while Samsung Electronics has surged over 175%.

This performance has propelled South Korea's benchmark KOSPI index to soar approximately 100%, making it one of the world's best-performing markets.

However, semiconductor stocks have recently come under pressure; both SK Hynix and Samsung Electronics fell sharply on Wednesday as the tech rally faltered.

Sources note that at least some of the restrictive measures were initiated even before this recent sell-off.

It is further reported that Bank of America, BNP Paribas, and UBS Group AG are also raising financing costs and limiting the size of swap trades on these two stocks.

Swap transactions are a common tool for hedge funds to place leveraged bets without physically holding the underlying assets.

In markets like South Korea, where few hedge funds possess exchange trading IDs, executing swaps through brokers becomes the default method for speculating on individual stocks.

Insiders added that the swap financing rates banks charge for SK Hynix and Samsung positions now range as high as 11%, representing a spread of up to 300 basis points over the Secured Overnight Financing Rate (SOFR).

With SOFR currently at 3.6%, the highest effective financing rate approaches 15%.

In early May, the associated spreads were only 100 to 200 basis points over SOFR.

The new rates apply to newly executed or rolled-over swap contracts.

Banks sometimes face difficulties finding counterparties willing to take the opposite side of bets on the continued rise of SK Hynix and Samsung, occasionally forcing them to use their own balance sheets, which limits their capacity to handle such business.

Sources state that banks are concerned that a sharp market reversal could erode the value of client positions, potentially triggering margin call defaults and resulting in losses for the banks.

While a traditional advantage of swap trading is its inherent leverage, some banks are now requiring clients to fully fund their positions.

Furthermore, upcoming large-scale listings, such as the $75 billion IPO for Space Exploration Technologies Corp. (SPCX) this week, are expected to consume significant bank capital, providing an additional incentive for banks to control the capital allocated to trades involving SK Hynix and Samsung.

Citigroup, JPMorgan, Goldman Sachs, and UBS declined to comment on the matter.

Bank of America and BNP Paribas did not immediately respond to requests for comment.

AI Boom Fuels Korean Stock Allocations

Over the past year, the Korean market has attracted substantial hedge fund interest due to regulatory moves lifting a short-selling ban and advancing corporate governance reforms.

Chipmakers, in particular, have been favored as perceived primary beneficiaries of the global AI race.

The combined weighting of SK Hynix and Samsung Electronics in the benchmark KOSPI index has now risen to approximately 53%, more than double the level from five years ago before the AI boom captivated global markets.

Exchange-traded funds (ETFs) are also fueling robust demand for these chip stocks.

The actively managed Roundhill Memory ETF (DRAM) from Roundhill Investments has seen its assets under management surge to $16.7 billion since its launch in early April.

Data shows that, as of Thursday, SK Hynix and Samsung together accounted for over 40% of that ETF's holdings.

Compiled data indicates that a Hong Kong-listed ETF from CSOP Asset Management Ltd., designed to deliver twice the daily return of SK Hynix and launched just eight months ago, surpassed $10.9 billion in assets earlier this month.

The swap financing rates offered by different banks for the same stock vary based on the bank, the specific client, the types and sizes of other assets held by the hedge fund, the strength of the relationship with the prime broker, and the bank's own ability to match trades.

Affected by investors pulling out of AI-related trades, South Korea's KOSPI index plunged nearly 9% during Monday's session, triggering a 20-minute trading halt.

Shares of SK Hynix have continued to decline this month, and the assets of the CSOP fund have also contracted.