South Korean financial authorities are reviewing improvements to single-stock leveraged and inverse products for Samsung Electronics and SK Hynix, according to the government and financial investment industry on the 10th. Deputy Prime Minister and Minister of Strategy and Finance Gu Yun-cheol stated on the 7th at the National Assembly Strategy and Finance Committee plenary session that discussions are underway on how to supplement and minimize problems caused by leveraged products increasing stock market volatility. The products were introduced to redirect domestic investors' overseas investment demand, which the government had identified as a driver of high exchange rates, but have faced criticism for side effects outweighing benefits, with Financial Supervisory Service Governor Lee Chan-jin expressing regret and acknowledging policy failure.
Government Proposes Deposit Requirement Increase to 30-50 Million Won
The most prominently discussed measure is raising the basic deposit requirement. The current 10 million won deposit would be increased to a range of 30 million won to 50 million won to raise the entry barrier. Related education is also expected to be strengthened. Currently, investors must complete a total of 2 hours of education—1 hour of general education and 1 hour of advanced education—to invest in single-stock leveraged products.
Quote Gap Issue Caused 90.18% Deviation Rate on the 8th of Last Month
Improvements are expected to address the problem of rising deviation rates in leveraged products due to quote gaps immediately before market close, when liquidity providers' quote submission obligations are relaxed. On the 8th of last month, SK Hynix stock price fell 7.68%, but Korea Investment Trust Management's "ACE SK Hynix Single Stock Leverage" surged 49.70% at the end of trading. As a large volume of market price orders came in during the quote gap period, the deviation rate soared to 90.18%. Attention is focused on whether measures to distribute rebalancing, which is concentrated at times when quote presentation obligations are relaxed, will be materialized. Rebalancing refers to the process of readjusting the proportion of underlying assets (Samsung Electronics and SK Hynix) to meet target returns. Leveraged and inverse products have a structure similar to the options market's "short gamma," where they buy more when stock prices rise and sell more when stock prices fall, so their impact on volatility is relatively large.
Market Structure Factors Contribute to Volatility Expansion
The expansion of related volatility is largely due to the characteristics of the domestic stock market, represented by the "semiconductor duo." For example, the semiconductor duo accounts for more than half of the KOSPI 200 index, so rebalancing related to KOSPI 200 leveraged and inverse products, not just single-stock leveraged products, is also affecting volatility expansion. In this context, concerns have been raised that single-stock leverage is dominating stock market volatility—that "the tail is wagging the dog"—but some point out that more detailed analysis is needed. Since overseas stock markets are also experiencing semiconductor concentration and resulting volatile market conditions, countermeasures should be prepared by considering both "structural factors" and "individual factors" summarized as unique domestic stock market characteristics.
Industry Voices Concerns Over Demonization of Leveraged Products
An industry official stated, "We must not repeat the mistakes of the past when short selling was demonized," and "It is necessary to accurately identify the cause and prepare a solution." Considering that financial authorities nominally permitted single-stock leverage under the pretext of "resolving domestic and foreign regulatory gaps" and the significantly increased asset size of related products, observations suggest it is more likely to seek demand suppression or technical supplementation rather than delisting.
FAQ
What deposit requirement did the South Korean government propose for single-stock leveraged ETFs?
The government is considering raising the basic deposit requirement from the current 10 million won to a range of 30 million won to 50 million won to raise the entry barrier for single-stock leveraged and inverse products for Samsung Electronics and SK Hynix.
What caused the 90.18% deviation rate in the ACE SK Hynix leveraged product on the 8th of last month?
On the 8th of last month, SK Hynix stock price fell 7.68%, but the ACE SK Hynix Single Stock Leverage product surged 49.70% at the end of trading. A large volume of market price orders came in during the quote gap period when liquidity providers' quote submission obligations are relaxed, causing the deviation rate to soar to 90.18%.
