Korea to Cap Single-Stock Leveraged ETFs to Curb Retail-Driven Volatility

South Korea’s financial authorities announced a series of measures late on July 29 to curtail retail investment in single-stock leveraged exchange-traded funds, following an emergency meeting convened by Finance Minister Koo Yun-cheol. The officials said concentrated trading in these products had contributed to heightened market volatility and pledged to respond swiftly.

The proposed measures include capping the share of single-stock leveraged ETFs in individual portfolios, raising trading costs, and imposing heavier financial burdens on brokerage firms. According to the Korea Times, one option under consideration is a cap of 20% of retail investors’ portfolios, though no final threshold has been set. The finance ministry confirmed that the authorities plan to limit retail involvement, including capping exposure as a share of total portfolios and raising trading costs, but did not specify amounts.

In addition, the government will seek a legal basis for emergency market-stabilization measures, drawing on overseas precedents such as Hong Kong’s flexible leverage regime, the ministry said in a statement. The authorities also plan to maintain round-the-clock market monitoring at the highest alert level.

The meeting was attended by Bank of Korea Governor Shin Hyun-song, Financial Services Commission Chairman Lee Eog-weon, and Financial Supervisory Service Governor Lee Chan-jin, as well as senior presidential secretary for economic growth Ha Jun-kyung, according to the Korea Times.

The new steps come on top of restrictions set to take effect on July 31. Starting Friday, the minimum cash deposit required to invest in single-stock leveraged ETFs will be raised to 30 million won ($20,600) from 10 million won, the Korea Times reported. In August, a mandatory pre-trading education program will be extended from two hours to three hours. And in November, investors will be allowed to trade these products only in batches of 20 shares, a move regulators say will reduce turnover.

The authorities are also considering introducing a simulated trading requirement in addition to the existing education program, the Korea Times added.

The emergency measures follow a sharp selloff in South Korea’s equity market. The Kospi index has plunged about 40% from its June peak, Bloomberg reported. The selloff deepened on July 29 after SK Hynix Inc. reported weaker-than-expected earnings, raising doubts about the artificial-intelligence investment boom and accelerating retail selling. The fall triggered a market-wide circuit breaker for a second straight day.

Single-stock leveraged ETFs were rolled out domestically in May. At a series of parliamentary hearings on the same day, lawmakers argued that the products have amplified Kospi swings, making the market more volatile than global peers because speculative trading had become concentrated in a handful of blue-chip stocks, such as Samsung Electronics Co. and SK Hynix.

Finance Minister Koo apologized at the hearings, acknowledging that authorities should have examined the products more carefully before their launch, Bloomberg reported. Opposition lawmakers questioned why the products were introduced at an unusual speed despite concerns from the asset-management industry, arguing officials prioritized stock-price gains over stability.

“The country has turned into a casino,” People Power Party lawmaker Lee Jongwook told Koo during the hearing, according to Bloomberg. “These are products that should never have been allowed onto the market. I consider this a policy failure.”

Several lawmakers said regulators failed to adopt safeguards used in other markets, noting that Hong Kong has not listed comparable products linked to domestic-listed companies. They also criticized authorities for approving two-times leverage in a market dominated by Samsung and SK Hynix.

Meeting participants assessed that the recent volatility was also driven by intensifying competition in the memory chip industry due to the rise of Chinese rivals, along with concerns over fundraising by major U.S. technology companies, the Korea Times reported. They agreed that Korea’s economic fundamentals remain strong and said excessive concerns over the stock market outlook should be avoided.