South Korea’s Financial Supervisory Service: Deeply regrets approving the Samsung and SK Hynix leveraged ETFs; 92% of holders are retail investors, and it is currently working on control measures

South Korea’s Financial Supervisory Service (FSS) Governor Lee Chan-jin publicly admitted on Monday (June 22) that he "deeply regrets" allowing the leveraged ETFs tracking Samsung Electronics and SK Hynix to be listed in late May. This marks the first official response from the FSS at the governor level since the 16 leveraged ETFs on individual stocks were launched in late May, and his strong wording has sparked significant attention in the Korean financial market.

Monthly asset size tripled

Lee Chan-jin stated that the total assets of these ETFs at launch were about $3 billion, and by Monday, the size had expanded to approximately 14 trillion Korean won (about $1B), nearly tripling in less than a month.

"These are high-risk products, with about 92% of holders being retail investors," Lee pointed out. "Even though regulators have issued multiple consumer warnings, trading enthusiasm shows no signs of cooling down."

It is understood that these 16 ETFs are issued by eight Korean asset management firms, including Samsung Asset Management, Mirae Asset, and KB Asset Management. The subscription threshold requires a deposit of 10 million Korean won, and investors must complete a one-hour online risk course. However, these regulations seem to have failed to effectively filter out high-risk investors.

The "leveraged fire" logic transplanted from Hong Kong is less effective than expected

Bloomberg reported that the launch of these Korean stock leveraged ETFs was partly inspired by similar products in the Hong Kong market.

Since the listing of the "CSOP SK Hynix Daily 2x Leveraged Product" in Hong Kong last October, it has quickly become the largest of its kind globally, with assets surpassing $14 billion as of Monday.

Lee Chan-jin said that the original intention of designing domestic ETFs in Korea was to "bring Korean investors back from Hong Kong leveraged products," but "this goal does not seem to have been achieved."

The simultaneous growth of similar products in both regions reflects the high enthusiasm of global investors for AI semiconductor concept stocks.

How leveraged ETFs "self-amplify" market volatility

Leveraged ETFs are designed to allow investors to use derivatives and swap contracts to pursue multiple returns with small capital, but their inherent structure also acts as a volatility amplifier.

Because issuers must rebalance their positions daily to ensure the leverage ratio and promised exposure, large fluctuations in the underlying stocks can force issuers to buy or sell large amounts of assets in a short period, further pushing up or down the stock prices, creating a "rebalancing effect."

Goldman Sachs' latest report pointed out that these Korean leveraged ETFs have become an "unprecedented important dynamic" in the market structure. Goldman estimates that if the Korean stock market experiences a 5% move in a single day, the rebalancing capital flows triggered by options traders adjusting risk exposure could reach about $4.7 billion, roughly one-eighth of the total daily trading volume of stocks on the Korea Exchange.

Three-party joint development of regulatory measures

Lee Chan-jin said that the FSS is currently working closely with the Financial Services Commission (FSC) and the Korea Exchange to develop multiple market stabilization measures. These include strengthening trading pattern monitoring, improving credit risk control mechanisms, enhancing investor risk disclosures, and considering restrictions on margin trading.

During the press conference, Lee candidly admitted that when the ETFs were launched, "the stock market had already risen sharply, and there were concerns," but ultimately, they could not prevent it. He said, "Half-jokingly, I should have just stayed still at that time. Now I really regret it. Looking back, I can't help but think whether I should have used every possible method, even protesting on the ground, to stop it from being listed."

Such rare public regret from a senior official indicates that Korean regulators view these leveraged ETFs as potential systemic risks. Whether further regulatory actions will follow remains to be seen.