Leveraged ETF scale surges 431% in one year, South Korean National Assembly initiates institutional reform discussions.

After single-stock leveraged products were identified as exacerbating market volatility and harming retail investors, the South Korean National Assembly will initiate discussions on institutional reforms, raising expectations of tighter regulation.

On July 3, according to South Korea’s Herald Economy, the Special Committee for High-Quality Capital Markets under the Democratic Party of Korea will hold an internal closed-door review meeting on the 6th, officially launching capital market policy discussions for the second half of the 22nd National Assembly.

A core member of the special committee revealed that the committee is currently investigating the status of the leveraged ETF market, with the review scope covering multiple proposals such as whether to retain the products and strengthen market access, and will further consult with financial regulatory authorities afterwards.

The governor of the Financial Supervisory Service (FSS) had previously made public statements regarding single-stock leveraged ETFs for Samsung Electronics and SK Hynix, effectively acknowledging policy errors and proposing the need to establish investor protection mechanisms. This statement is seen by outsiders as a clear signal of the regulator’s shift in stance toward such products.

Rapid product expansion prompts regulator to issue early warning

Single-stock leveraged ETFs for Samsung Electronics and SK Hynix were officially launched at the end of last year, initially aimed at redirecting demand from overseas securities investment back to the domestic market amid a high exchange rate environment.

However, after listing, the products’ scale expanded rapidly, and market volatility correspondingly increased.

The FSS governor adopted a stern tone at a press conference last month. He stated:

The extremely high turnover rate of the related products results in profits for brokerages, while actual participants do not benefit—only the management and operation systems profit.

The FSS governor said he is "personally deeply concerned" about this. This is the most direct criticism of leveraged ETFs from senior South Korean financial regulators so far.

A Democratic Party lawmaker also posted on social media, calling on financial authorities to re-examine the impact of single-stock leveraged products on the market. The lawmaker stated:

Actively study plans to gradually reduce the influence of leveraged products to protect individual investors and maintain market stability.

Consensus within the party: Review the product regulatory framework from scratch

A basic consensus has formed within the special committee on the need to tighten leveraged ETFs.

Another committee member compared leveraged ETFs to short selling, saying, "If leveraged ETFs cause the stock market to lose credibility, it will weaken the overall power of the capital market," and clearly stated that the committee will "start from scratch to review whether regulatory measures need to be introduced or just partial supplements are needed."

The core judgment within the party is that the excessive concentration effect of leveraged ETFs may hinder the healthy development of the capital market.

Currently, the semiconductor sector is booming, with a large amount of capital concentrated in Samsung Electronics and SK Hynix. Combined with increased volatility in their stock prices, single-stock leveraged products are believed to have amplified this effect further.

Background of the special committee: Key driver of capital market legislation

The committee was previously a party-affiliated special body established after the Lee Jae-myung government took office to promote the "KOSPI 5000" target.

In February of this year, as the Korea Composite Stock Price Index (KOSPI) successfully broke through the 5,000-point mark, the relevant special committee was officially renamed to its current name.

Subsequently, the committee listed promoting the rational return of the price-to-book ratio (PBR), revitalizing the KOSDAQ (junior) market, improving the stablecoin regulatory framework, and introducing a stewardship code for institutional investors as core legislative agendas.

Currently, the special committee has not yet made a decision on the specific regulatory direction for leveraged ETFs. From internal investigations to formal legislation, multiple procedural steps remain, and the attitude of cooperation from financial authorities will be a key variable.

However, the intensive statements from senior party members and regulators have substantially raised expectations that these products will face stricter constraints.

For market participants, the regulatory direction of leveraged ETFs related to Samsung Electronics and SK Hynix warrants continued attention. If access thresholds are tightened or product scales are limited, the short-term liquidity patterns of the relevant underlying assets may change accordingly.

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