South Korea's financial authorities are preparing a package of measures aimed at curbing the impact of newly launched leveraged single-stock exchange-traded funds (ETFs) tied to the country's two largest semiconductor firms after a dramatic market selloff intensified concerns over market stability.
Financial Services Commission Chairman Lee Eog-weon said authorities were coordinating with the finance ministry, the Bank of Korea and the Financial Supervisory Service on steps intended to protect investors and bolster market stability, according to comments translated and reported earlier by Bloomberg. The finance ministry said officials were due to meet later on Thursday, but it did not announce any specific steps at that time.
The move follows a rapid reversal in South Korean equities. The KOSPI, which hit a record high in June after more than doubling year-to-date, plunged into bear market territory amid a spike in volatility. The benchmark fell as much as 7.6% on Thursday, while Samsung Electronics and SK Hynix each slid by more than 9% during the rout.
The leveraged ETFs at the center of the debate were launched roughly two months ago and are constructed to provide twice the daily return of the underlying stocks. Market participants have increasingly pointed to the funds' end-of-day rebalancing transactions as a force that has amplified price swings in Samsung Electronics and SK Hynix, Korea's largest semiconductor names.
Among options being considered by regulators are raising the minimum investment required to buy these leveraged products from the current 10 million won threshold and altering rebalancing procedures so that trades are more evenly distributed through the trading day rather than concentrated near the close.
These leveraged ETFs have become popular quickly with retail investors. Together with the two chipmakers themselves, the leveraged products now account for over 70% of trading value on South Korea's roughly $4.1 trillion stock market, a degree of concentration that market observers say increases systemic volatility and raises concerns about market resilience.
When asked whether regulators were contemplating suspension of trading in the ETFs, Chairman Lee said the authorities were reviewing the matter comprehensively, according to the translation of his remarks.
The regulatory discussion followed remarks from President Lee Jae Myung on Wednesday that South Korea's stock market had become more unstable after its historic rally and that follow-up regulatory measures should be prepared.
Analysts expect the authorities to prioritize stepped-up investor protections rather than imposing an outright ban. Possible actions under consideration include tightening investor suitability requirements or expanding mandatory investor education, measures designed to limit participation by investors deemed unsuitable for highly leveraged products, rather than fully prohibiting the funds.
The focus on leveraged single-stock ETFs has coincided with broader volatility in semiconductor valuations globally. Seoul's stock declines came after weakness in U.S. chipmakers overnight, and continued selling by foreign investors further pressured Korean equities. Earlier on Thursday a side car trade curb was activated after the benchmark index dropped more than 5%.
Market context and implications
Regulators are confronting a rapid rise in retail flows into structurally concentrated trades tied to the nation's largest technology exporters. Because the leveraged ETFs mechanically rebalance to maintain their 2x exposure, their trading patterns can force large buys or sells in the underlying single stocks, particularly near session close, contributing to sharper intraday moves. The combination of concentrated trading volumes and the mechanical nature of leveraged funds has put renewed focus on how trading design and investor access can affect price formation in a market already exposed to global semiconductor sector swings.
Next steps
Officials from the finance ministry and related agencies were scheduled to convene later on Thursday to discuss measures, though no formal policy decisions were announced at the time of the comments cited by regulators. Authorities have signaled they are considering calibration of both investor eligibility and operational design of the funds to temper concentrated trading and reduce end-of-day pressure.