South Korea Triples Deposit Requirement, Halts New Listings of Single-Stock Leveraged ETFs After Market Rout

South Korea’s top economic policymakers agreed Thursday to curb single-stock leveraged exchange-traded funds after a punishing market rout exposed the products’ role in amplifying volatility, according to the country’s Financial Services Commission and local press reports.

The Financial Services Commission said it would temporarily suspend new listings of such ETFs, ban securities firms and asset managers from advertising or marketing existing products, and triple the minimum cash deposit required for new investments to 30 million won ($20,303), as reported by the Korea Times and other outlets. Previously, investors needed to put up 10 million won and could meet up to 70% of that requirement with the value of stocks they already owned; under the new rules, the entire deposit must be paid in cash.

Regulators also agreed to raise the minimum order size to 20 units from one until market conditions stabilize, and to strengthen requirements for liquidity providers to prevent market prices from diverging excessively from underlying asset values. Current deviation limits are 3% for domestic stock ETFs and 6% for overseas products. Securities firms and asset managers that breach the rules will face tougher penalties, the Korea Times reported.

The higher deposit requirement is set to take effect in August, while the change in minimum trading units will be implemented in November, giving brokerages time to update systems.

The crackdown came after daily turnover in 16 leveraged and inverse ETFs tied to Samsung Electronics and SK Hynix reached 18.27 trillion won on Tuesday, accounting for about 39% of total ETF trading, according to the Korea Times. Some products have lost more than half their value this month. When SK Hynix shares tumbled 15.37% on Monday, leveraged products tracking the chipmaker fell as much as 31.46% in a single session.

President Lee Jae Myung raised the issue at a policy briefing Wednesday and urged financial regulators to “quickly put together well-crafted follow-up measures,” the Korea Times reported.

The regulatory push also took place against a broader sell-off in Korean stocks. The Bank of Korea on Thursday raised its policy interest rate by 0.25 percentage points to 2.75%, its first rate increase in more than three years and the first under Governor Shin Hyun-song, according to a report by Zerohedge. Shin cited robust economic growth driven by demand for memory chips, persistent weakness in the won, elevated inflation and growing financial imbalances. Korean consumer inflation rose 3.2% in June from a year earlier, its fastest pace since December 2023. The won has weakened 5% against the dollar year-to-date to its lowest level since the 2008 global financial crisis.

The stock market extended losses after the announcements. The Kospi slumped 6.4% on Thursday, falling about 27% from its June peak and back into bear-market territory, triggering additional trading halts, according to the same report. Samsung Electronics and SK Hynix shares fell 8.8% and 12%, respectively, on the day, though both stocks have more than doubled and nearly tripled year-to-date.

Leveraged ETFs, which launched in South Korea in May and are largely tied to Samsung Electronics and SK Hynix, are designed to amplify daily moves in the underlying stocks by two times. Most traders blame them for exacerbating volatility through the daily rebalancing needed to maintain their investment objective, Zerohedge reported. A 3x levered Kospi ETF, KORU, was down 70% from its June 1 all-time high as of Thursday.

Industry officials broadly support stronger safeguards but warned that overly restrictive rules could push local investors toward similar products listed overseas, the Korea Times reported. Triple-leveraged products tracking Samsung Electronics and SK Hynix trade in the U.K., while U.S.-listed ETFs linked to Samsung Electro-Mechanics and Hyundai Motor could launch as early as August.

“Recent volatility reflects a combination of factors, including not only the rebalancing of leveraged ETFs but also the macroeconomic backdrop and swings in global semiconductor stocks,” an industry official told the Korea Times. “Finding a clear solution may prove difficult, as policymakers seek to balance investor protection with the need to preserve market functioning.”

The Korea Financial Investment Association (KOFIA) and 10 major brokerages also agreed to examine ways to strengthen the market-stabilizing role of liquidity providers and spread rebalancing trades over longer periods, the Korea Times reported. A concentration of transactions shortly before the market close has fueled concern that the products are amplifying swings in their underlying shares.