Samsung Electronics and SK Hynix single-stock leveraged exchange-traded funds (ETFs), which track double the daily return of the underlying stocks, have faced a sharp regulatory crackdown just 50 days after their launch. As individual investors poured over 7 trillion won into these products through leveraged bets and short-term speculative funds, driving stock market volatility to extremes, South Korean financial authorities unveiled supplementary measures that significantly raise the entry barrier, including tripling the base deposit requirement and expanding the trading unit to 20 shares.
The Financial Services Commission (FSC) held a market conditions review meeting on the 16th, chaired by Deputy Prime Minister for Economic Affairs Koo Yun-cheol, and finalized the “Supplementary Measures for Single-Stock Leveraged Products.” This came just one day after President Lee Jae-myung, during a policy briefing the previous day, ordered authorities to “swiftly prepare supplementary measures.” The core of the plan raises the base deposit requirement from the current 10 million won to 30 million won (approximately $20,169) and abolishes the practice of accepting substitute securities such as stocks or bonds as deposits, recognizing only cash. The minimum trading unit will also be expanded from 1 share to 20 shares, and new listings, advertising, and marketing will be temporarily suspended.
These measures were triggered because warning signs about the uncontrollably ballooning market size, losses, and market volatility had crossed a critical threshold. According to the Korea Exchange and Koscom ETF CHECK, from the 16th of last month to the 15th of this month, total inflows into the 16 Samsung Electronics and SK Hynix single-stock leveraged and inverse products reached 7.34 trillion won (approximately $4.9 billion). The “KODEX SK Hynix Single-Stock Leveraged” alone attracted 3.45 trillion won (approximately $2.3 billion), followed by “KODEX Samsung Electronics Single-Stock Leveraged” at 1.51 trillion won and “TIGER SK Hynix Single-Stock Leveraged” at 1.43 trillion won.
The problem was that individual investors continued to pour money into leveraged products even as the underlying stock prices plummeted. During the same period, SK Hynix shares fell 19.49% and Samsung Electronics dropped 24.33%. Yet individual investors net purchased 4.24 trillion won (approximately $2.8 billion) across seven SK Hynix leveraged products and 1.61 trillion won (approximately $1.1 billion) across seven Samsung Electronics leveraged products. This far exceeded the scale of foreign net buying. Institutional investors, conversely, net sold over 5 trillion won (approximately $3.4 billion), taking the exact opposite position from individuals.
Whenever stock prices fall, leveraged products suffer exponentially growing losses due to the “negative compounding effect.” Indeed, the “KODEX SK Hynix Single-Stock Leveraged,” which saw the largest inflows, plunged 45.60% over the month, while the “KODEX Samsung Electronics Single-Stock Leveraged” plummeted 48.44%. The average decline across the 14 single-stock leveraged products reached 47.1%.
As losses snowballed, forced liquidations—where stocks are compulsorily sold due to inability to repay debts—also surged. According to the FSC, the amount forcibly liquidated from the product launch date of May 27 through July 14 reached 1.11 trillion won (approximately $743.1 million). The forced liquidation ratio, which averaged around 1.1% from January to April before the launch, breached 10% twice, hitting 10.5% on June 9 and 10.2% on July 9. On July 9 alone, 142.2 billion won (approximately $95.6 million) was forcibly liquidated, roughly five times the previous day’s 28.5 billion won.
Rebalancing trades, where leveraged products mechanically buy and sell near market close to maintain target leverage ratios, further amplified volatility. Lee Jun-young, an analyst at Eugene Investment & Securities, explained, “When losses occur in leveraged ETFs, the collateral value within accounts declines, leading to collateral shortages for other credit trading positions, which ultimately cascades into forced stock liquidations.” He added, “The intraday KOSPI fluctuation range nearly doubled from an average of 2.9% before the leveraged ETF listings to 5.5% afterward.”
Financial authorities expect these measures to reduce the market capitalization of single-stock leveraged products, currently around 12 trillion won (approximately $8.1 billion), to approximately 4-5 trillion won (approximately $2.7-3.4 billion). Byun Je-ho, Director of the FSC’s Capital Markets Bureau, stated, “The 30 million won amount is not the only important factor; the cash-only requirement is expected to significantly contribute to easing demand.” He added, “Since securities firms initially projected a market cap of 4.4 trillion won (approximately $3.0 billion) at launch, we judged it necessary to bring it back to that level.”
Authorities plan to implement the base deposit increase on August 5, the abolition of substitute securities and cash-only recognition on August 19, and the trading unit expansion in November following securities firms’ system development. Pre-trade education hours will also increase from the current one hour to two hours, with a retake required for scores below 60. The liquidity provider’s (LP) closing price tracking error management obligation will be tightened from the current 3% to 2%, and repeated violations will result in designation as an investment caution security.
However, the market’s reaction was chilly. On the day of the policy announcement, the KOSPI closed at 6,820.60, down 6.37% from the previous session, and disappointed selling poured into Samsung Electronics and SK Hynix on the Nextrade (NXT) after-market. Kang Jin-hyuk, a senior analyst at Shinhan Investment Corp., noted, “These supplementary measures are merely partial adjustments to existing regulations,” adding, “Disappointed selling emerged on NXT following the policy announcement.”
Questions are also being raised within the industry about the effectiveness and basis of the regulations. While the FSC projected the market would shrink to 4-5 trillion won based on the 30 million won threshold, acknowledging there is “no absolute formula” for the standard, it did not disclose specific account distribution data or analysis of the expected reduction in trading value. A securities industry official pointed out, “If a regulation is a policy that restricts investor choice, corresponding objective evidence and effectiveness analysis should also be presented.”
Delisting and reducing the leverage ratio were excluded from these measures. FSC Chairman Lee Eok-won dismissed calls for delisting, stating it “could cause greater side effects in the market.” Director Byun Je-ho also explained, “Currently, single-stock leveraged products are showing signs of overheating with excess demand, so they do not meet delisting requirements,” adding, “Lowering the leverage ratio to 1.5x would require a beneficiary meeting, which is even more difficult than a shareholders’ meeting, so it was not included as an alternative.”
Meanwhile, financial authorities maintained their stance that single-stock leveraged products are an “amplifying factor” rather than the “cause” of stock market volatility. According to the FSC, the annualized daily return volatility of memory semiconductor stocks was actually higher for U.S.-based SanDisk at 131%, Micron at 123%, and Japan’s Kioxia at 118%, compared to SK Hynix at 113% and Samsung Electronics at 96%. The analysis suggests that high market concentration in South Korea amplified volatility amid recurring expectations and concerns about the global semiconductor industry cycle.
The FSC stated, “We do not believe that preventing trading in risky products is the desirable direction,” adding, “A mature investment culture where investors understand risks and invest according to their capabilities must grow alongside.” Authorities plan to continuously monitor the market after implementing these measures and will consider additional supplementary actions if stability is not achieved.