SK Hynix Plunge Triggers Regulatory Overhaul: Hong Kong Shifts from '2x Leveraged' to 'Flexible Leverage'

Amid the AI-driven investment frenzy, SK Hynix emerged as a key beneficiary, but its stock has since sharply reversed, triggering a crisis for leveraged ETFs. The 'CSOP SK Hynix Daily Leverage (2x) Product,' once touted as the world's largest single-stock leveraged ETF, suffered a devastating blow. SK Hynix's share price has declined nearly 46% from its June high, causing the 2x leveraged product’s net asset value to plummet over 80%. In just over a month, the fund’s assets crashed from HK$132 billion to HK$31.9 billion, erasing over HK$100 billion in market value.

To address extreme market volatility and enhance investor protection, the Hong Kong Securities and Futures Commission (SFC) revised its regulatory framework, mandating that leveraged and inverse products with capacity constraints adopt a 'flexible leverage' mechanism starting August 3. Under the new rules, the previous 'fixed 2x leverage' will shift to a 'maximum 2x' dynamic structure. Fund managers will now determine the daily leverage ratio based on market liquidity and trading costs, with the minimum level adjustable down to 1.1x (or -1.1x for inverse products).

Responding to market concerns, issuer CSOP Asset Management announced that 12 of its single-stock leveraged products—including those linked to Nvidia and Tesla—will be renamed to include the term 'MAX' to reflect the new structure. Despite the changes, CSOP emphasized that under normal market conditions, the products will continue to target 2x leverage. The flexible mechanism is intended solely for extreme scenarios—such as capacity limits or surging transaction costs—and fund managers will not actively adjust leverage based on market outlook.

Industry experts remain cautious. Zhang Zhiwei of SinoPac Securities noted that the new rule aims to discourage overnight holding, as leveraged products could face margin calls at the open following extreme news events. Mai Ka-ka of Yuanta Securities suggested the product nature is shifting from 'gambling speculation' to 'dynamic risk management.' With leverage ratios changing daily—akin to 'opening a blind box'—investment difficulty and return predictability have significantly increased.

Meanwhile, South Korean regulators are tightening policies in parallel, considering capping individual investors’ leveraged ETF exposure at 20% of their total financial assets. This wave of regulatory changes signals a broader shift from innovation encouragement to strict risk control, urging investors to remain vigilant about the compounding effects and NAV deviation risks of high-leverage products during extreme market conditions.