South Korea’s F4 high-level policy coordination body will meet on Thursday to study responses to the market impact of single-stock leveraged exchange-traded funds. It is the first time the issue has been formally brought to the country’s top economic coordination platform, which includes the Ministry of Economy and Finance, the Financial Services Commission, the Bank of Korea, and the Financial Supervisory Service.
The immediate trigger was Monday’s sell-off. The KOSPI fell more than 8% in a single session, setting off the market’s seventh circuit breaker of the year, and market attention quickly turned to single-stock leveraged ETFs.
These products amplify the daily moves of one stock, which can intensify price action when volatility is already elevated. The ETFs were launched on May 27 and allow investors to take 2x exposure to Samsung Electronics and SK Hynix. Because returns are tied to a multiple of each day’s move in the underlying stock, the funds need to buy or sell the shares daily to maintain exposure, a mechanism that has been cited as a source of added volatility.
Before Thursday’s government meeting, securities firms and asset managers in South Korea were already planning an industry meeting on Tuesday to discuss leveraged ETFs and broader market conditions.
Regulators say the problem is structural
On July 13, Financial Supervisory Service Governor Lee Chan-jin chaired a closed-door meeting at the Korea Financial Investment Association in Yeouido, with representatives from 20 asset management firms in attendance. Lee said, “There is a structural problem, so it is unlikely that we can provide a clear answer.”
He added, “Under the current circumstances, this issue cannot be resolved all at once. It requires ongoing monitoring, revision, and improvement.” He did not explain in detail what he meant by a structural problem.
Lee also said, “This does not seem to be an area where any one person can make the call. The authorities (the Financial Services Commission) may also need broad deliberation. We (the Financial Supervisory Service) will do our best, but at the moment we are in a position where we have to take criticism. Asset management companies should candidly share practical demands and institutional suggestions, which will become an important reference for policy decisions.”
At a regular press briefing on the 22nd of last month, Lee had said, “I regret not doing everything I could to stop the launch of single-stock leveraged ETFs.” The day after that remark, the KOSPI plunged 10%. From the 22nd of last month to the 13th of this month, the KOSPI posted a cumulative decline of more than 25%.
Earlier this month, he also said regulators were “seriously reviewing the unintended consequences that have emerged since these products were launched.”
Possible measures under review before the Thursday meeting
Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol said at a National Assembly session last week that, “Given that multiple issues have been raised, discussions are under way on measures to remedy and minimize the related problems.”
Kim Yong-beom, the presidential chief of policy, said at a press briefing that the F4 meeting was closely studying how single-stock leveraged ETFs were aggravating market volatility, adding that “if remedial steps are necessary, a decision will be made at the F4 market condition review meeting.”
According to South Korea’s financial investment industry, authorities have formally asked asset management companies to submit specific suggestions on how to improve products that may be contributing to volatility. After gathering industry views, officials plan to move into formal policy design.
The main options under discussion fall into three buckets:
- raising margin requirements
- limiting daily price swings
- adjusting the upper limit on leverage ratios
The Financial Services Commission is set to convene experts from major securities firms and asset managers on the 14th to discuss supplementary measures for single-stock leveraged products. Specific ideas include increasing minimum margin requirements, meaning the amount investors must deposit in advance, and strengthening pre-investment education.
Officials have also acknowledged that these steps “may only be temporary fixes, rather than a solution to the structural roots of market volatility.” That leaves room for further policy changes even if Thursday’s meeting produces an initial decision.
Volatility and trading halts have surged
Market data cited in the report shows a sharp jump in volatility after the products were introduced. According to NH Investment & Securities, in the 96 trading days before launch, the KOSPI moved more than 3% in either direction on 26 days, or 27% of the time. In the 33 trading days after launch through the 13th, that share rose to 52%, or 17 days.
For comparison, the S&P 500 has not recorded a single daily move of 3% or more so far this year.
Data from the Korea Exchange shows that, as of the 13th, the securities market had triggered 35 sidecars this year, including 17 buy-side triggers and 18 sell-side triggers. That is far above the three recorded in all of last year, and it had already surpassed the previous record of 26 set during the 2008 global financial crisis before July was even over.
Full market circuit breakers have been triggered seven times this year, more than half of the 13 total activations recorded since the mechanism was introduced in 2000.
The Wall Street Journal also said: “Volatility in the South Korean stock market has been further amplified by leveraged products tied to Samsung Electronics and SK Hynix.”
A month and a half after launch, the issue has reached the top policy level
Kim Yong-beom said the products have been operating for about a month and a half, and the F4 “will closely assess their actual impact on the market.”
After roughly six weeks in the market, single-stock leveraged ETFs have pushed regulatory pressure beyond the Financial Supervisory Service and up to South Korea’s highest economic decision-making level. The next policy direction now depends on the conclusions reached at Thursday’s F4 meeting.