No More All-In? South Korea Proposes 20% Cap on Single-Stock Leveraged Investments, Calls for 'State Compensation'

South Korea's stock market has recently experienced severe volatility, with the KOSPI and KOSDAQ indices repeatedly triggering circuit breakers, sending market sentiment into panic. To address the market downturn and prevent individual investors from overexposure, the Financial Services Commission (FSC) announced on July 28 that it is considering stricter regulations on leveraged products tied to individual stocks, with the most discussed proposal being a 20% investment cap.

Retail Investors Suffer Heavy Losses

South Korea's leveraged ETF market for individual stocks is currently facing a crisis among retail investors, as many have repeatedly added positions in an attempt to 'average down,' only to sink deeper into losses. Statistics show that by mid-July, over 1.2 million leveraged retail accounts had hit margin call levels, with approximately 320,000 to 360,000 accounts fully liquidated by brokers.

Reports indicate a 45-year-old office worker invested 34 million KRW in a semiconductor leveraged ETF, and despite five additional purchases, still faced over 50% unrealized losses. Another 25-year-old university student borrowed living expense loans to increase holdings, ultimately losing nearly half of the principal.

The core reason for these heavy losses is the 'negative compounding effect' of leveraged ETFs. These products track twice the daily return of the underlying asset, and in volatile, up-and-down markets, even if the underlying stock price returns to its original level, the ETF cannot recover due to decay.

Critics argue that regulators rushed the introduction of these products without adequately assessing market impact or risk management mechanisms, leading to significant asset losses for retail investors. Some voices now explicitly call for state compensation due to regulatory failure and urge the National Assembly's political committee to conduct inquiries and investigations into the product approval process.

Core Measure: 20% Position Limit via Aggregate Management

According to South Korean media including the JoongAng Ilbo, the FSC is studying an 'aggregate management rule' that would limit individual investors’ exposure to a single-stock leveraged product to no more than 20% of their total financial investment portfolio.

For example, if an investor has total financial assets of 100 million KRW, the maximum amount they could allocate to a specific single-stock leveraged product would be capped at 20 million KRW. This measure aims to prevent retail investors from making 'all-or-nothing' speculative bets and reduce the concentrated impact of high-risk products on personal wealth.

Regulatory Background: Rapid and Distorted Growth of the Leveraged Market

This strong regulatory intervention stems from the distorted expansion of the single-stock leveraged market. Data shows that since these products launched at the end of May, their total market capitalization surged over 170% in less than two months, rising from 4.4 trillion KRW to 11.9 trillion KRW.

Accompanying this growth is massive forced liquidation risk. As of July 13, over 1.2 million leveraged retail accounts had reached margin call levels, with 320,000 to 360,000 accounts already forcibly liquidated by brokers, and some investors even ending up with negative balances.

Tightening Investment Thresholds and Market Mechanisms

In addition to position limits, regulators have already implemented several reinforcing measures. Starting July 31, the minimum cash margin required for retail investors to enter this market will be sharply increased from 10 million KRW to 30 million KRW.

Furthermore, the FSC is considering the following additional measures:

- Strengthening investor qualifications: Requiring pre-trade simulation and periodic re-education for leveraged single-stock products, similar to futures and derivatives. - Reducing market volatility: Requiring asset management firms to spread rebalancing activities throughout the trading day instead of concentrating them near market close. - Regulating liquidity providers (LPs): Encouraging LPs to voluntarily adjust quote sizes and order frequencies to reduce artificial trading volume inflation from excessive arbitrage trading.

FSC Chairman Lee Eog-weon emphasized that the commission will first monitor the effectiveness of the new margin requirements implemented at the end of July. If market demand does not sufficiently subside, additional measures such as the 20% investment cap will be studied and prepared for early implementation. The regulatory scope will cover leveraged ETFs and ETNs linked to stocks such as Samsung Electronics, SK Hynix, and overseas names like Tesla (TSLA-US) and NVIDIA (NVDA-US).