Hynix ADR swap is about to open—will the 30% premium start to converge?

KSD, the Korea Securities Depository, will accept applications to swap SK hynix ordinary shares with ADRs. The specific acceptance window still depends on the depository bank, Citibank, to notify.

The most important takeaway from this news is that the premium on SK hynix ADRs may shrink.

In the initial listing period of SK hynix ADRs, there had been an extreme premium of around 50%. That reading reflected how existing supply on the U.S. side was being chased in a concentrated manner when ADRs and the underlying shares could not yet be swapped. Currently, the premium of SK hynix ADRs over the Korean underlying shares is still above 30%.

On July 29, this channel was opened.

For individual investors, this is not a single button in a trading app. It requires broker application, depository steps, foreign exchange, and settlement. But the market doesn’t need every retail trader to be able to press that button. As long as a group of institutions can do it, the price will start to move.

Using TSMC as a reference

Taking TSMC as an example, the ADR premium can persist for a long time. In 2024, the quantitative asset management firm Acadian Asset Management recorded in a research note that TSMC U.S. ADS traded at roughly a 20% premium versus TSMC’s ordinary shares. The issue is not computation. For the same equity, everyone knows the corresponding relationship. The issue is whether ordinary shares can be converted into U.S. ADS quickly, at low cost, and in unlimited quantities.

TSMC’s experience is that ADRs can be cancelled into TSMC ordinary shares, but the creation of ADS from ordinary shares is constrained by an approved issuance limit and cross-market frictions. The door can open, but it doesn’t mean the elevator has arrived. Even if arbitrageurs know the spread will eventually revert, they still face risks such as stock lending, settlement, capital being tied up, and the spread continuing to widen.

Before July 29, SK hynix was even more extreme than TSMC. Ordinary shares could not be used to create ADRs, so U.S. demand could only chase the existing float of ADRs. Pushing up the premium didn’t require a new story.

After the 29th, the core constraints shift to quotas and process, rather than a complete inability to create. The ADR custody cap registered by Citibank in its F-6 filing is about 25% of SK hynix’s total shares; this initial issuance corresponds to only around 2.5% of share capital. This remaining headroom doesn’t guarantee immediate usability, but it is enough to show that the quota is not like a wall welded shut.

Once institutions can continuously buy SK hynix ordinary shares, create ADRs, and sell them into the U.S., the extreme premium will meet new supply. U.S. demand may still be strong. It just won’t have to rely only on arbitraging by lifting bids and offers within the existing ADR float.

This is also why the currently above-30% premium is more likely to converge after the 29th.

How traders arbitraged before the 29th

SK hynix’s conversion relationship is 1 share of Korean ordinary stock corresponds to 10 ADRs. Under synchronized calculations, the ADR premium equals SK hynix ADR price × 10 × the USD/KRW exchange rate ÷ Korean ordinary share price - 1.

Before July 29, more realistic positions in the market were concentrated between the decentralized perpetual trading platform Hyperliquid’s SKHY and SKHX perpetual contracts, and shares in both markets.

When the funding rate is positive, perpetual longs pay and perpetual shorts receive. When the funding rate is negative, the direction reverses. Settlement occurs hourly.

The first strategy is long ADRs and short SKHY perpetuals. Practically, one buys SKHY and then shorts perpetuals on Hyperliquid with the notional amount in a way that resembles nominal shorting. With a positive funding rate, the shorts receive payments each hour. This trade looks like it is harvesting funding-rate payments, but in reality it also keeps a position that benefits from the ADR premium. If the ADR premium continues to widen, it can be profitable. After July 29, if the spread narrows, the funding rate may not be sufficient to cover this portion of loss.

The second strategy is short ADRs and long multiple shares. This is the position that directly bets on spread convergence. It corresponds to the old TSMC-style problem: shorting the expensive side, buying the cheaper side, and waiting for the market to re-link the pricing. The risks are also the same as TSMC’s. The spread may still move for a while before it truly converges.

The third strategy is long Korean ordinary shares and short SKHY perpetuals. Buy the underlying shares on a Korean broker, then short the perpetuals on Hyperliquid. With a positive funding rate, the shorts collect fees, and the underlying share longs offset most of the company stock price fluctuations. This is more like a funding-rate trade rather than an ADR premium trade. It is also not a truly risk-free position. Perpetuals are traded 24 hours a day, while Korean stocks are not. Basis can remain due to differences in indexes, mark prices, the USD/KRW exchange rate, and margin.

This is also why the combined trading volume of SKHY and SKHX contracts on Hyperliquid can exceed that of Bitcoin.

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