South Korean Stocks Drop Over 10%; Regulators Consider Stricter Rules on Single-Stock Leveraged ETFs

Lee Eog-weon, chairman of South Korea's Financial Services Commission (FSC), said Tuesday (28th) that authorities are considering further restrictions on single-stock leveraged ETFs, which have surged in popularity in recent years. Measures under review include setting investment limits for retail investors to stabilize the volatile market.

The regulatory move comes amid a sharp sell-off in South Korea's semiconductor 'twin giants'—Samsung Electronics and SK Hynix. On Tuesday, Samsung Electronics' share price plummeted over 10% due to concerns that its market share could be eroded by Chinese rival ChangXin Memory Technologies (CXMT), along with financing risks tied to AI infrastructure spending. SK Hynix was not spared, with its stock price falling over 13% at one point, and its U.S.-listed ADR dropping below its issue price.

Dragged down by these two tech leaders, South Korea's benchmark KOSPI index triggered a market-wide circuit breaker on Tuesday morning, halting trading for 20 minutes. This marks the eighth time the index has halted trading this year. The KOSPI index ended the midday session down over 10%.

Earlier, to protect investors and reduce market volatility, regulators decided to raise the minimum cash margin required to invest in single-stock leveraged ETFs from 10 million won to 30 million won (approximately $20,400). Originally scheduled for August implementation, authorities moved the effective date forward to July 31 (Friday) following a call from President Yoon Suk-yeol for swift action.

During meetings with domestic securities firms and asset management companies, Lee Eog-weon clearly stated that regulators will closely assess the effectiveness of the new policy. If demand does not cool as expected, the government is prepared to escalate interventions, including proposing to cap individuals' leveraged ETF investments at 20% or less of their total financial assets.

Additionally, authorities are discussing other complementary measures, such as requiring investors to regularly attend mandatory online training and simulated trading courses, and accelerating plans to increase the minimum trading unit size.

These single-stock leveraged ETFs, linked to semiconductor stocks and launched in May this year, were initially designed to attract more retail capital into the domestic market. However, their popularity among retail investors has surged, with trading volume now accounting for over 70% of total stock market turnover in South Korea. Regulators believe these high-risk products significantly amplify volatility during market downturns, creating a vicious cycle.