South Korea's Financial Services Commission (FSC) has announced a set of regulatory measures aimed at managing the risks associated with single-stock leveraged exchange-traded funds (ETFs). The actions include a suspension on new product listings, a ban on related advertising, and an increase in the investment threshold. These steps are intended to curb the severe market volatility recently triggered by leveraged products tied to Samsung Electronics and SK Hynix.
The new regulations consist of three main components. First, the minimum cash margin requirement for investing in these leveraged ETFs will be raised from the current 10 million won to 30 million won (approximately $20,000), and this requirement must be met with cash only. Previously accepted collateral such as stocks or other ETFs will no longer be permitted. Second, until market stability is achieved, the listing of any new products in this category will be halted, and all related advertising is prohibited. Third, the minimum trading unit will be temporarily increased from one share to twenty shares to discourage excessively active short-term trading.
This regulatory intervention follows an earlier directive from President Lee Jae-myung this week calling for "swift measures." The head of South Korea's Financial Supervisory Service, Lee Chan-jin, had previously expressed regret over approving the listing of these products, stating their negative impact had grown significantly.
The 16 leveraged ETFs offering 2x exposure to Samsung Electronics and SK Hynix were listed on the Korea Exchange on May 27. Their initial purpose was to attract leveraged investment demand that had been flowing to overseas markets back to the domestic market. However, after listing, a massive influx of retail capital occurred. The products' daily rebalancing mechanism—which involves buying more of the underlying stock when its price rises and being forced to sell when it falls—has been cited as a key factor in significantly amplifying the volatility of the target stocks. By the close of trading on July 16, the KOSPI index had fallen nearly 30% from its peak in June.
The Financial Services Commission stated it will continue to monitor market conditions and will consider implementing additional phased measures if stability is not restored.