South Korean financial regulators are moving to revise the Capital Markets Act and give authorities emergency intervention powers to take direct market-stabilization steps during periods of sharp stock-market volatility. The Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) have started work on the legal amendments, with the focus on single-stock leveraged exchange-traded funds that were seen as amplifying swings during the recent stock-market sell-off.
Proposal targets single-stock leveraged ETFs
Measures under discussion include adjusting leverage ratios and setting investment caps. Some single-stock leveraged ETFs in South Korea currently operate with leverage of up to 2x. Regulators are reviewing whether they should be allowed to temporarily lower those leverage ratios during abnormal market volatility in order to reduce risks tied to concentrated trading flows.
The plan references recent steps taken in Hong Kong. The Securities and Futures Commission of Hong Kong previously allowed institutions that meet standards on asset-management capability, risk controls, and disclosure to adjust the multiples of listed leveraged and inverse products, giving regulators more room to respond to changing market conditions.
Regulators say current rules are too slow in extreme conditions
South Korean regulators said the current framework may require approval from a fund holders’ meeting for matters involving changes to a fund’s return structure. In their view, that makes it difficult to respond quickly enough in extreme market environments. They are therefore looking to build an emergency regulatory mechanism that can be activated without going through complicated procedures.
Beyond leverage adjustments, regulators are also considering individual investment limits for single-stock leveraged ETFs and a unified investment cap of around 20% to prevent excessive concentration of funds. They are also reviewing the introduction of a real-trading simulation system to improve investor understanding of the risks tied to leveraged products.
Investment caps would complement higher margin requirements
According to South Korean regulators, raising the base margin requirement mainly increases the entry threshold, while investment caps would act as a ceiling on fund inflows. The two tools would work together as a complementary risk-control framework.
South Korea had already raised the minimum margin requirement for investors in single-stock leveraged ETFs from 10 million won to 30 million won starting on July 31. Data showed that on the first day of the new rule, trading in 16 related leveraged ETFs totaled about 3 trillion won, roughly one-quarter of the previous trading day’s 12.4 trillion won and about 80% lower than the 15 trillion won recorded on July 29.