South Korean financial authorities face criticism over supplementary measures for single-stock leveraged exchange-traded funds (ETFs) announced on May 16, four days after which lawmakers called for potential additional action. The Financial Services Commission (FSC) raised the basic deposit requirement from KRW 10 million to cash KRW 30 million and expanded the trading unit from 1 to 20 units for products tracking Samsung Electronics and SK Hynix. The measures aim to address market concentration as the combined market cap share of the two stocks rose from 34% at the end of last year to 52% as of July 15, while the 16 related products' market cap grew from KRW 4.4 trillion at listing on May 27 to KRW 11.9 trillion as of July 15. Market participants question whether the announced thresholds will effectively curb demand, as trading activity remained at KRW 12.3 trillion on July 20, similar to the announcement day's KRW 12.2 trillion.
KRW 30 Million Cash Deposit Controversy Persists as Lawmakers Call for Additional Measures Four Days After Announcement
The Ministry of Economy and Finance, FSC, Financial Supervisory Service, and Bank of Korea announced the supplementary measures on May 16 following a market monitoring meeting chaired by the Deputy Prime Minister for Economic Affairs. The 16 single-stock leveraged ETF and exchange-traded note (ETN) products had grown from KRW 4.4 trillion in market cap at listing to KRW 11.9 trillion as of July 15. Daily trading volume increased from KRW 10.4 trillion to KRW 13 trillion over the same period.
Authorities suspended new product listings and prohibited advertising and promotional events for existing products. The basic deposit for individual retail investors will rise from KRW 10 million to cash KRW 30 million, effective August 5. Substitute securities including stocks, bonds, and general ETFs will no longer be accepted as of August 19. The trading unit for domestic listed products will expand from 1 unit to 20 units, scheduled for implementation in November following brokerage system development.
The FSC estimated that the market cap of related products would decline to KRW 4 trillion to KRW 5 trillion once the deposit increase and trading unit expansion take effect. However, the disclosed materials did not include detailed methodology showing how investor account distribution and trading patterns were factored into the calculation.
Market observers questioned whether the cash KRW 30 million threshold is high enough to discourage investment. The 20-unit trading requirement may reduce small-scale accessibility but does not alter the operational structure or rebalancing trades of leveraged products themselves.
Trading activity on July 20, the first trading day after the announcement, showed little cooling. The 16 Samsung Electronics and SK Hynix single-stock leveraged and inverse products recorded KRW 12.3264 trillion in trading volume, similar to the KRW 12.1674 trillion on the announcement day of May 16.
Democratic Party lawmakers on the National Policy Committee requested during a party-government consultation on July 20 that the FSC "monitor the market more intensively and prepare additional measures if necessary," according to reports. The request reflected political recognition that existing measures may prove insufficient.
FSC Provides No Empirical Analysis or Specific Criteria for Triggering Further Regulatory Action
The FSC identified rebalancing as the primary channel through which leveraged products affect underlying stocks. According to the FSC's example, if a product's market cap is KRW 10 trillion and the underlying asset price moves 3% in one day, approximately KRW 600 billion in rebalancing trades could occur to maintain the tracking multiple.
However, this represents a theoretical estimate based on product size and underlying asset volatility. Assessing actual market impact requires separating ETF on-exchange trading volume from underlying stock transactions. Not all investor-to-investor ETF trades translate into underlying stock orders, necessitating analysis of creation-redemption volumes and hedging and rebalancing orders by asset managers and liquidity providers to gauge the impact on Samsung Electronics and SK Hynix volatility.
Volatility driven by global semiconductor industry conditions must also be isolated. According to FSC data, annualized stock price volatility from May 26 to July 10 reached 131% for US-based SanDisk, 123% for Micron, and 118% for Japan's Kioxia, exceeding SK Hynix's 113% and Samsung Electronics' 96%. The FSC acknowledged that recent semiconductor stock fluctuations cannot be attributed solely to domestic single-stock leveraged products.
Determining the impact of leveraged products requires separating global semiconductor stock volatility from the effects of domestic product creation-redemption and rebalancing. However, authorities presented only the channels through which leveraged products could amplify volatility and theoretical trading volumes, without disclosing quantitative results on actual contribution to Samsung Electronics and SK Hynix volatility.
Criteria for introducing additional measures remain unclear. An FSC official told The Fact that when asked about the possibility of further measures, "It is difficult to answer. However, if the situation does not stabilize, it is consistent with common sense that additional measures should be introduced."
Regarding the criteria for determining market instability, the official explained, "There is no single correct answer; it must be approached with general common sense. It is a matter of professional judgment." The FSC did not specify which metrics among product market cap, trading volume, tracking error, and underlying stock volatility should reach what levels to constitute market stabilization.
A financial investment industry official stated, "Given that the first measure faces pressure for revision before implementation, financial authorities need to clarify the objectives and evaluation criteria of existing measures before adding regulations. Without empirical analysis of market impact and clear criteria for triggering additional regulations, repeatedly layering measures may increase policy uncertainty rather than stabilize the market."
FAQ
Why did South Korean authorities announce supplementary measures for single-stock leveraged ETFs on May 16?
Authorities announced the measures to address rapid growth and market concentration concerns. The 16 products tracking Samsung Electronics and SK Hynix grew from KRW 4.4 trillion in market cap at listing on May 27 to KRW 11.9 trillion as of July 15, while the two stocks' combined KOSPI market cap share rose from 34% at the end of last year to 52% as of July 15.
What criteria will the FSC use to determine if additional regulatory measures are needed?
The FSC has not provided specific criteria. An FSC official stated that determining market instability is "a matter of professional judgment" and must be "approached with general common sense," without specifying thresholds for product market cap, trading volume, or underlying stock volatility that would trigger further action.
