South Korea Suspends New Single-Stock Leveraged ETFs, Triples Margin as Market Rout Deepens

South Korea’s top economic policymakers agreed Thursday to a sweeping clampdown on single-stock leveraged exchange-traded funds, suspending new product listings, banning advertising, and tripling the minimum cash deposit for new investors to 30 million won ($20,303).

The measures, announced after an emergency meeting of the country’s so-called F4 group — the Ministry of Finance and Economy, the Financial Services Commission, the Financial Supervisory Service and the Bank of Korea — are aimed at reining in speculative trading that regulators say has amplified recent wild swings in the local stock market.

New Regulations

The Financial Services Commission said it will temporarily halt new listings of single-stock leveraged ETFs and ban securities firms and asset managers from advertising or marketing existing products. The minimum order size will be raised to 20 units from one until market conditions stabilize, according to the Korea Times.

The minimum deposit for new investments is being tripled to 30 million won and must be paid entirely in cash. Previously, investors could meet up to 70 percent of the 10 million won deposit requirement with the value of stocks they already owned, the Korea Times reported.

Liquidity providers will face stricter requirements to prevent market prices from diverging excessively from underlying asset values. Current deviation limits are 3 percent for domestic stock ETFs and 6 percent for overseas products. Securities firms and asset managers that breach the rules will face tougher penalties, the Korea Times added.

The higher deposit requirement takes effect in August, while the change in minimum trading units will be implemented in November to give brokerages time to update their systems.

Market Turmoil

The regulatory push came as daily turnover in leveraged and inverse ETFs tied to Samsung Electronics and SK Hynix reached 18.27 trillion won on Tuesday, accounting for about 39 percent of total ETF trading, the Korea Times reported. Some products have lost more than half their value this month.

When SK Hynix shares tumbled 15.37 percent on Monday, leveraged products tracking the chipmaker fell as much as 31.46 percent in a single session, according to the Korea Times.

The broader market also suffered. The Kospi slumped 6.4 percent on Thursday, falling about 27 percent from its June peak and back into bear-market territory, Zerohedge reported. Samsung Electronics and SK Hynix shares each fell 8.8 percent and 12 percent, respectively, on Thursday, though both stocks have more than doubled and nearly tripled, respectively, this year.

South Korea’s central bank added to the pressure by raising its policy rate by 0.25 percentage points to 2.75 percent, its first rate increase in more than three years, Zerohedge said. Bank of Korea Governor Shin Hyun-song cited robust economic growth from the semiconductor boom, persistent weakness in the won, and elevated inflation — which hit 3.2 percent in June, well above the 2 percent target — as reasons for the tightening.

The won has weakened 5 percent against the dollar year to date, hitting its lowest level since the 2008 global financial crisis, Zerohedge reported, adding that exports surged 70.9 percent in June, the fastest rate in nearly half a century.

Industry and Political Response

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

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

KOFIA said in a statement that the products “can broaden investment options and help develop Korea’s capital markets,” but added that “stronger protections were needed since demand since the products’ launch exceeded initial expectations. Leveraged products can magnify losses over short periods and may also generate losses in sideways markets because of the effects of daily compounding.”

Industry officials broadly support stronger safeguards but warned that overly restrictive rules could push local investors toward similar products listed overseas. 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, the Korea Times reported.

“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.