South Korea has introduced a series of new regulatory measures targeting single-stock leveraged exchange-traded funds (ETFs).

The country's Financial Services Commission officially announced the steps on July 16, identifying such products as a significant factor contributing to heightened volatility in the stock market.

Key Regulatory Measures Introduced

The core actions, as reported by Korean media, include several major changes. The minimum margin requirement for single-stock leveraged ETFs will be raised from the current 10 million won to 30 million won. Furthermore, only cash will be accepted as eligible collateral, with alternative securities like government bonds no longer counting towards the margin.

Authorities will also suspend the listing of any new single-stock leveraged ETF products and prohibit related advertising campaigns. Trading in these ETFs will be limited to 20 units per transaction, a move designed to help stabilize their prices.

Additional measures involve tightening the management of ETF premiums and discounts. The standard for brokerage oversight will be tightened from the current 3% to 2%. Finally, the mandatory investor education time required before trading these products will be extended from two hours to three hours.

The measures to raise the basic margin requirement are scheduled to take effect in August.

Brokerage Firms Adjust Policies

In response to the regulatory environment, Korean securities firms have begun adjusting their policies. KB Securities has decided to cancel preferential policies, such as margin exemptions, for these products. The firm has notified clients that it is adjusting the basic margin requirements for domestic leveraged ETFs and exchange-traded notes (ETNs), which previously varied based on a client's membership tier.

Significant Losses for Retail Investors

The move comes amid extreme volatility in the Korean stock market and related leveraged ETFs. Data shows that over the past nine trading days, valuation losses for single-stock leveraged ETFs, which are popular with retail investors, have cumulatively exceeded 8.8 trillion won.

Four leveraged ETFs tracking Samsung Electronics and SK Hynix, issued by Mirae Asset Global Investments and Samsung Asset Management, saw valuation losses of 8.8337 trillion won between July 1 and 13. Their combined assets under management shrank by 37.7%, falling from 14.3518 trillion won to 8.9389 trillion won.

Overall, the 14 listed single-stock leveraged ETFs tracking these two companies saw their total assets drop 41.4% from 15.9349 trillion won at the end of June to 9.3386 trillion won by July 13. Samsung Electronics-linked ETFs fell 35.3%, while those linked to SK Hynix dropped 44.9%.

According to data from the Korea Capital Market Institute, individual investors had a cumulative net purchase of approximately 8.2 trillion won in single-stock leveraged ETFs as of June 19, accounting for about 60% of the assets in these products. This suggests a substantial portion of the recent losses has likely been borne by retail investors.

Authorities had previously indicated plans to address the market volatility exacerbated by these ETFs linked to major chip stocks.

On July 16, the benchmark KOSPI index closed down 6.37% at 6,820.6 points, bringing its cumulative decline for July to nearly 20%. Among individual stocks, SK Hynix fell 11.53% and Samsung Electronics dropped 8.77%.