Raise the barrier! Korean broker discusses increasing the minimum deposit requirement for leveraged chip-stock ETFs

South Korea’s financial industry is seeking to tighten the admission thresholds for leveraged ETFs on chip stocks to address market volatility risks and investor-loss problems caused by these products.

Bloomberg reported Wednesday that the Korea Financial Investment Association said the CEOs of 10 major asset management companies in the country discussed investor-protection measures for ETFs that target individual stocks with leverage. Core topics included raising minimum deposit requirements and spreading out daily rebalancing trading times. Those present agreed that it is necessary to raise the minimum deposit requirement for investing in such leveraged products from the current level of 10 million won (about $6,714).

The backdrop for the above discussions is that more than a dozen leveraged ETFs tracking Samsung Electronics and SK Hynix have nearly halved in price since they were launched in late May. Investor losses have been severe, and calls for regulation of these high-risk products have intensified.

Sharp pullbacks expose risks

The performance of the leveraged ETFs since their launch has led to major investor losses. Data shows that the prices of more than a dozen leveraged ETFs tracking Samsung Electronics and SK Hynix have fallen by nearly half since they were launched in late May.

Among them, the largest product, SAMSUNG KODEX SK Hynix Single Stock Leverage, has assets under management of about $3.4 billion. Since its launch, it has fallen by about 45%, and the decline from the June peak is more than 60%.

The sharp pullbacks have concentratedly exposed the inherent risks of making leveraged bets on South Korea’s two major chip giants. Because issuers typically need to buy at highs and sell at lows to maintain the fund’s pledged leverage ratio, such products can not only amplify investors’ losses but also further intensify price swings when the market is volatile.

Large-scale rebalancing trading hits market stability

In addition to investor protection, the impact of daily rebalancing trading on the market has also drawn industry attention. The Korea Financial Investment Association cited data from the Korea Capital Market Research Institute, saying that since the launch of the relevant leveraged ETFs, the estimated stock trading volume required for daily rebalancing is about 700 billion to 2.1 trillion won.

At present, rebalancing trading is concentrated in the period before the close, creating a concentrated shock to market prices. In response, asset management companies said they need to work to spread rebalancing activities across different time windows during trading days to smooth their impact on the market. Participants also noted that it is necessary to further strengthen the role of liquidity providers as a market stabilizer to ease liquidity pressure under extreme conditions.

Based on the results of this discussion, South Korea’s asset management industry plans to strengthen risk control over leveraged ETFs on individual stocks from multiple angles. On the entry side, by raising minimum deposit requirements to screen investors with stronger risk tolerance; on the trading side, by dispersing the rebalancing time windows to reduce concentrated impact on the secondary market; and on the market mechanism side, by focusing on improving the buffering function of liquidity providers under extreme conditions. Currently, the above measures are still under discussion, and specific plans still need to be clarified further.

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