South Korea caps single-stock leveraged ETFs, vows emergency steps after Kospi rout

South Korea’s financial authorities on Wednesday unveiled additional restrictions on single-stock leveraged exchange-traded funds, including a cap that could limit an individual’s investment in such products to 20% of their total investment assets, the finance ministry said.

The measures follow an emergency market meeting hosted by Finance Minister Koo Yun-cheol, which included all of the country’s top financial authorities, starting at 6 p.m. local time, according to lawmaker Yoo Dong-soo.

“Participants agreed that concentrated trading in single-stock leveraged products has contributed to heightened market volatility and pledged to respond swiftly and decisively,” the finance ministry said in a statement.

The government will also raise the cost of related trading to curb excessive activity, potentially by applying charges similar to those imposed for excessive order submissions in the futures market, the ministry said after the meeting. Authorities will introduce simulated trading requirements in addition to existing investor education, and prepare a legal basis allowing regulators to take market stabilization measures in emergencies, drawing on examples including Hong Kong’s flexible leverage framework.

The measures will be pursued immediately, the ministry said, while previously announced safeguards, including raising the minimum cash deposit requirement to 30 million won ($20,646), will take effect from July 31. South Korea has already halted new listings of single-stock products and banned advertising for them.

The Kospi fell 5.98% on Wednesday, after dropping 10.84% in the previous session. The index has plunged about 40% from its June peak. The selloff deepened on July 29 after SK Hynix Inc. reported weaker-than-expected earnings, raising doubts over the artificial-intelligence investment boom and accelerated retail selling. The fall triggered a market-wide circuit breaker for a second straight day.

Authorities said they would maintain round-the-clock monitoring of financial markets and deploy available policy tools if needed.

At a series of parliamentary hearings on Wednesday, lawmakers argued that single-stock leveraged ETFs — which were rolled out domestically in May — have amplified Kospi swings, making South Korea’s equity market significantly more volatile than global peers because speculative trading had become concentrated in a handful of blue-chip stocks.

Finance Minister Koo apologized at the hearings, acknowledging that authorities should have examined the products more carefully before their launch. He maintained that leveraged ETFs were only one of several factors behind the recent market turmoil.

“We’ve already put in place a package of measures, but if it’s needed we’ll introduce additional steps to help normalize the market,” Koo told lawmakers.

The hearings broadened into an attack on the government’s handling of the policy. Opposition lawmakers questioned why the products were introduced at an unusual speed despite concerns from much of the asset-management industry, arguing officials prioritized efforts to boost stock prices over market stability.

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

Pressed by opposition lawmakers on whether he would step down if the fallout from the policy worsens, Koo said it would be irresponsible to speculate about resigning, adding that his focus was on stabilizing markets.

The May 27 introduction of single-stock leveraged ETFs has seen Korean retail investors pile in with net purchases of 14 trillion won ($9.7 billion), compared with roughly 2 trillion won by foreign investors, according to KB Financial Group.

Goldman Sachs analysts tracking the Korean leveraged ETF market noted that a great deal of the exposure has already been unwound. Korea-focused leveraged ETF assets under management have declined to $15-16 billion, down more than 70% from the peak of $53 billion on June 22. Over the same period, Korean equities have declined by 40%.

“The deleveraging and selloff in Korea have increasingly taken on a life of their own,” said Rajeev De Mello, global macro portfolio manager at Gama Asset Management.