South Korea plans to introduce restrictions on leveraged single stock ETFs to address market volatility

South Korea plans to introduce restrictions on leveraged single stock ETFs to address market volatility

Investing.com - South Korea is preparing to implement regulatory measures for leveraged exchange-traded funds (ETFs) linked to Samsung Electronics (KS:005930) and SK Hynix (KS:000660). Previously, these products have come under close scrutiny from regulators for allegedly exacerbating volatility in the Korean stock market following sharp declines.

According to statements translated and reported by Bloomberg, Financial Services Commission (FSC) Chairman Lee Ik-yeon stated that authorities are collaborating with the Ministry of Finance, the Bank of Korea, and the Financial Supervisory Service to explore measures to protect investors and maintain market stability. The Ministry of Finance also indicated that officials expect to hold a meeting later on Thursday, but no specific measures have been announced yet.

The backdrop for this regulatory action is the dramatic reversal experienced by the Korean stock market. The Korea Composite Stock Price Index (KOSPI) had seen its cumulative gains exceed 100% this year and reached an all-time high in June, but subsequently fell into a bear market amid significant volatility. On Thursday, the benchmark index dropped as much as 7.6%, with Samsung Electronics and SK Hynix both declining over 9%.

These leveraged ETFs were launched only two months ago, designed to provide double the daily returns of the respective stocks. However, market participants increasingly attribute the sharp price fluctuations to the rebalancing trades conducted before the market close, believing they have intensified the price swings of Korea's largest semiconductor stocks.

Measures under consideration by authorities include raising the minimum investment threshold for related products from the current 10 million Korean won and changing the rebalancing trading method to distribute trading activity more evenly throughout the trading session rather than concentrating it before the market closes.

These products have quickly gained popularity among retail investors. According to Bloomberg data, leveraged ETFs linked to Samsung Electronics and SK Hynix, along with the two chip manufacturers themselves, currently account for over 70% of the trading volume in South Korea's $41 trillion stock market, raising ongoing concerns about excessive market concentration and systemic volatility risks When asked whether regulatory authorities are considering suspending trading of related ETFs, Li Yiyuan stated in his remarks that the authorities are conducting a comprehensive review of this issue.

This discussion stems from President Yoon Suk-yeol's statement on Wednesday. He pointed out that the stock market has become increasingly unstable after a historic rise and called on regulatory authorities to be prepared for follow-up measures.

Analysts expect that the authorities will lean towards strengthening investor protection measures rather than taking more aggressive intervention steps. Possible actions include enhancing investor suitability requirements or expanding mandatory investor education, rather than directly banning related products.

At the same time, concerns about overvaluation in artificial intelligence have triggered volatility in global semiconductor stocks, putting additional pressure on the Korean stock market. The decline in the Seoul stock market followed the overnight weakness in U.S. chip stocks, with foreign investors continuing to reduce their holdings of Korean stocks, further intensifying market pressure. In early trading on Thursday, the benchmark index fell more than 5%, triggering the Side Car trading restriction mechanism.

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