Korean stocks experienced severe declines in July, with the KOSPI index falling 21.07% through July 24 and circuit breakers triggering for 10 consecutive trading days. The sell-off was driven by surging oil prices—Brent crude reached $100.69—and rising US Treasury yields above 4.70%, which intensified risk-off sentiment. South Korean regulators responded by accelerating new cash deposit requirements for single-stock leveraged products to July 31, requiring investors to maintain KRW 30 million in cash to trade these instruments.
Oil Prices and Interest Rates Drive Market Decline
According to the Korea Exchange on July 26, the KOSPI index declined for four consecutive weeks: -4.58% in the first week of July, -9.85% in the second week, -6.46% in the third week, and -1.91% in the fourth week, closing at 6690.62. Circuit breakers were activated 41 times on the KOSPI and 25 times on the KOSDAQ this year. From July 10, circuit breakers triggered on at least one market for 10 consecutive trading days excluding holidays and weekends.
Middle East tensions reignited risk-aversion. After Houthi rebels announced attacks on two Saudi Arabian oil tankers, September Brent crude surged 7.04% in a single day to $100.69 on July 24. The oil price spike revived concerns about inflation and additional US interest rate hikes, pushing the 10-year US Treasury yield above 4.70% for the first time in 18 months.
Foreign investors net purchased KRW 5.572 trillion on the securities market during the first four trading days of the week but sold KRW 3.2827 trillion on July 24 alone. Institutional investors net sold KRW 2.7992 trillion for the week. Individual investors net purchased only KRW 459.9 billion and showed net selling for three consecutive trading days during the week.
Single-Stock Leveraged Products Record Heavy Losses
Semiconductor stocks, which carry significant weight on the securities market, were at the center of the decline. Samsung Electronics fell 10.73% for the week, breaking below the KRW 250,000 level, while SK Hynix plunged 15.51% to surrender the KRW 1.76 million level. Kia (-10.00%), Hyundai Motor (-7.60%), LG Electronics (-12.78%), and DB HiTek (-17.22%) also dropped sharply. In contrast, Samsung Biologics (9.76%), Naver (9.44%), Hanwha Ocean (7.20%), and Hanwha Aerospace (5.38%) rose, continuing sector differentiation.
The sharp declines in Samsung Electronics and SK Hynix amplified losses in single-stock leveraged products tracking these stocks. Fourteen products that launched at KRW 20,000 per share have fallen to between KRW 10,635 and KRW 13,015, recording losses of 34.93% to 46.83% from listing prices. Critics note that with Samsung Electronics and SK Hynix accounting for over half of KOSPI's market capitalization, the launch of leveraged products that attracted trading volume intensified concentration. Trading in underlying assets and derivatives to match returns has created a "wag the dog" phenomenon where exchange-traded funds (ETFs) shake the entire index.
Regulators Implement KRW 30 Million Cash Deposit Requirement
Lee Chan-jin, Governor of the Financial Supervisory Service, stated last month, "I regret not blocking (the system introduction) completely." President Lee Jae-myung ordered at a cabinet meeting on July 21, "Take bold response measures swiftly as needed." The Financial Services Commission moved forward the basic deposit strengthening measure originally scheduled for phased implementation next month to July 31. Under this measure, investors must maintain KRW 30 million in cash deposits to make new investments or additional purchases of single-stock leveraged products. Substitute securities such as stocks, ETFs, and bonds are not recognized. Proceeds from securities sales are only counted toward the basic deposit on T+2 when settlement completes and actual cash is deposited.
The asset management industry observes this measure could raise the investment threshold for individual investors. An asset management company official explained, "It's the concept of tying up KRW 30 million in cash like a jeonse deposit to buy stocks. If you deposit KRW 30 million and invest the same amount, the product exposure is KRW 60 million, but for the entire account it's effectively only 1x leverage." This means market size could shrink as small investors' new entries and additional purchases decline significantly. However, some argue it is difficult to pin single-stock leverage products alone as the culprit of volatility, noting that domestic stocks' volatility is not uniquely severe compared to overseas semiconductor companies.
Securities Firms Face System Development Pressure
The sudden schedule acceleration is also creating IT system burdens for securities firms. If system development is not completed by the deadline, new transaction handling will be restricted. A securities firm official said, "If development isn't done, it essentially means don't do business, so we have no choice but to work overtime to meet the schedule." Small and medium-sized securities firms complain it is difficult to secure sufficient testing time. Some critics argue that strengthening liquidity providers' (LP) deviation rate management obligations (from 3% to 2%) addresses the results of sharp price changes rather than the causes.
The Financial Services Commission is reviewing plans to advance the implementation of strengthened deviation rate management and raising the trading unit for single-stock products to 20 shares from the originally planned November to August 19. While cash deposit strengthening may have some effect in reducing speculative demand, concerns arise that it could excessively lower accessibility for small investors and increase IT burdens on small and medium-sized securities firms. How much trading volume and individual demand actually decrease after July 31, and whether market volatility calms, will be key issues determining the effectiveness of the measures. Investors also need to fully verify trading conditions and product structure changes following regulatory implementation before investing.
FAQ
What caused Korean stocks to fall 21% in July?
The KOSPI index fell 21.07% through July 24 due to surging oil prices and rising US interest rates. Brent crude reached $100.69 on July 24 after Houthi rebels announced attacks on Saudi Arabian oil tankers, while the 10-year US Treasury yield exceeded 4.70%. These developments intensified risk-off sentiment and triggered heavy selling in semiconductor stocks including Samsung Electronics (down 10.73%) and SK Hynix (down 15.51%).
What are the new regulations for single-stock leveraged products in Korea?
Starting July 31, investors must maintain KRW 30 million in cash deposits to trade single-stock leveraged products. The Financial Services Commission accelerated this requirement from its original phased implementation schedule. Only cash counts toward the deposit—substitute securities such as stocks, ETFs, and bonds are not recognized. Securities sales proceeds only count on T+2 when settlement completes and actual cash is deposited.
