The Democratic Party of Korea’s “Korea Premium K-Capital Market Special Committee” is actively considering a plan to lower the leverage multiplier on single-stock leveraged and inverse exchange-traded funds (ETFs) from the current 2x to 1.5x. These products have faced mounting criticism for attracting speculative retail capital and amplifying stock market volatility. The review comes just one day after President Lee Jae-myung, during a cabinet meeting on the 21st, pointed out the limitations of existing measures and ordered officials to “swiftly and boldly implement necessary countermeasures.”
Oh Ki-hyung, chairman of the special committee, told the Herald Business on the 22nd, “There are opinions that the leverage multiplier itself can be reduced, so we are examining this.” He added, “We are listening to market views on reducing the multiplier of already-listed products from 2x to 1.5x and assessing its feasibility at the committee level.” However, Chairman Oh drew a clear line against market speculation about potential delistings or the introduction of new underlying stocks beyond Samsung Electronics and SK Hynix, stating, “At this stage, eliminating factors that amplify volatility is the top priority, so there will be no additional listings.”
The review of the multiplier cut is drawing significant attention because South Korea’s financial authorities had previously expressed a negative stance, citing practical difficulties. Byun Je-ho, Director General of the FSC’s Capital Market Bureau, recently noted that such a move “runs counter to the original purpose of introducing leveraged products,” and that changing the current 2x multiplier to 1.5x would require convening a “beneficiary meeting,” which he described as “even more difficult than a shareholders’ meeting.” A beneficiary meeting is a gathering of the fund’s investors, and its convocation can be requested not only by the asset manager but also by the trustee or investors holding more than a 5% stake, making the process particularly cumbersome.
However, the atmosphere shifted dramatically following President Lee’s direct intervention. During the previous day’s cabinet meeting, the president strongly criticized existing supplementary measures, stating that leveraged ETFs “intensify rises during upswings and deepen declines during downturns,” and pointedly remarked, “There are criticisms questioning whether those measures will be sufficient.” In response, an FSC official changed their tone on the 22nd, saying, “Nothing is off the table,” indicating that all options are now open for discussion.
Experts assess that reducing the multiplier could be an effective alternative. Kim Dae-jong, a professor of business administration at Sejong University, commented, “Lowering the single-stock leveraged ETF multiplier from 2x to 1.5x could be a more effective alternative than raising margin requirements or strengthening investor education.” He added, “It can partially mitigate excessive loss risks and market volatility while preserving the investment function.”
Meanwhile, the special committee also disclosed that it is reviewing the extension of hedging hours for liquidity providers (LPs) “from a zero base, examining everything.” This measure aims to address the problem of massive hedging volumes flooding the market just before the close, which maximizes volatility in the spot market. Currently, South Korea’s ETF framework has structural limitations — including a 100% derivative risk assessment value regulation — that force leveraged ETFs to hold and directly trade large quantities of underlying stocks. An asset management industry source pointed out, “The most definitive improvement would be to relax regulations to allow leveraged ETFs to switch their hedging instruments from physical stocks to derivatives such as futures.”
Earlier, on the 16th, the FSC announced supplementary measures for single-stock leveraged ETFs, including raising the base deposit requirement from ₩10 million (approximately $6,742) to ₩30 million (approximately $20,227) and expanding the minimum trading unit from 1 share to 20 shares. However, the market criticized these as mere “stopgap measures,” and with President Lee personally pressuring for faster implementation, saying “it seems to be taking too long,” the FSC is now in discussions with the industry to accelerate the IT system development timeline.
In a recent report, global investment bank J.P. Morgan analyzed that “while corporate fundamentals in the South Korean market remain solid, aggressive deleveraging has dragged down stock prices,” and estimated that “approximately 75% of the leveraged ETF unwinding process toward what we consider an appropriate level of around $18 billion (approximately 26.7 trillion won) has already been completed.” With political pressure mounting from both ruling and opposition parties, the regulatory crackdown on single-stock leveraged ETFs is increasingly likely to be swifter and more forceful than initially anticipated.