South Korean Government Intervenes Urgently in Stock Market, Restricts Individual Stock Leverage ETFs and May Restart 'Stabilization Fund'

The South Korean government, responding to severe investor losses caused by recent stock market turmoil, held an emergency market meeting on Wednesday evening chaired by Finance Minister Koo Yun-cheol, officially announcing additional measures to stabilize financial markets. The core of these actions is restricting retail investors from trading 'individual stock leverage ETFs,' aiming to mitigate market volatility driven by highly concentrated speculative trading.

Market Turmoil and Frequent Circuit Breakers

South Korea's stock market has sharply reversed from the optimistic sentiment seen earlier in the year, fueled by artificial intelligence (AI) and semiconductor demand. The benchmark Korea Composite Stock Price Index (KOSPI) has plunged approximately 40% from its June highs. Particularly after SK Hynix reported weaker-than-expected earnings, skepticism toward the AI investment boom intensified, triggering a wave of retail sell-offs. At one point, the KOSPI index dropped over 12% in a single day.

This extreme volatility led South Korea's stock market to trigger a nationwide 'circuit breaker' mechanism for two consecutive trading days. Market participants attribute much of this instability to individual stock leverage ETFs, introduced in May. Due to speculative trading being heavily concentrated in a few blue-chip stocks like Samsung Electronics and SK Hynix, these products have amplified KOSPI's fluctuations, making South Korea's market significantly more volatile than comparable global markets.

Regulatory Tightening: Limiting Retail Exposure and Raising Barriers

South Korea's financial regulators plan to immediately implement a series of restrictive measures. These include setting risk exposure limits for retail investors in leverage ETFs, stipulating that such products cannot exceed a specific proportion of an individual's overall investment portfolio. Additionally, the government plans to increase trading costs and impose mandatory simulated trading requirements.

Furthermore, previously scheduled restrictions set to take effect on July 31 will proceed as planned, including raising the minimum cash margin requirement for individual stock leverage ETFs to 30 million Korean won. Regulators have already suspended the listing and advertising of new products of this type and are seeking to establish legal grounds empowering regulators to take emergency market stabilization actions, drawing reference from Hong Kong's flexible leverage framework.

Policy Failure Debate and Official Response

This market crisis has sparked intense political debate in South Korea. During a parliamentary hearing, opposition lawmakers questioned why the government fast-tracked approval of these high-risk products despite widespread concerns from asset managers, criticizing the prioritization of boosting stock prices over market stability.

People Power Party lawmaker Lee Jong-wook told Finance Minister Koo Yun-cheol: 'This country has turned into a casino.' He argued these products should never have been allowed and labeled it a 'policy failure.' In response, Finance Minister Koo publicly apologized during the hearing, acknowledging that regulators should have conducted a more thorough assessment before product launch and emphasized that the current priority is market stabilization.

The 'Stabilization Fund' May Be Reactivated?

While current policy focuses on deleveraging, the South Korean government has strongly signaled that 'direct market rescue tools' remain on the table. If forced liquidations continue to cause liquidity shortages and threaten financial institutions, the government may activate or restart the 'Stock Market Stabilization Fund' (commonly known as the stabilization fund).

South Korea has precedent for such measures, having established a 10.7 trillion won market stabilization fund in 2020. While not yet formally activated, the mention of 'establishing legal grounds' leaves room for future direct government intervention.

Global Impact on the Semiconductor Industry Chain

From a global perspective, South Korea's move to restrict leverage ETFs is seen as a 'hemostatic catalyst' for the semiconductor and AI computing industry chain. Given Samsung and Hynix's massive market capitalization weight in the KOSPI index, forced rebalancing sales from leverage ETFs can create a vicious cycle of falling prices.

Analysts believe that restricting these leveraged instruments could reduce cross-market price contagion from South Korean blue chips to related firms like TSMC, Micron, and NVIDIA. A JPMorgan report indicates that the current deleveraging process may be nearing its end, with foreign capital outflows highly concentrated in a few memory-heavy stocks rather than signaling a broad-based balance sheet crisis.