From 2x to 1.1x During Market Plunge... 'Emergency Powers' to Reshape Samsung-SK Leveraged Products

Financial Authorities Push for Introduction of Emergency Market Intervention Powers... Capital Markets Act Amendment Underway
Exploring Hong Kong-Style Variable Leverage... Flexible Adjustment of Leverage Ratios Possible
Trading Volume of Samsung-SK

The financial authorities, after raising the minimum deposit for single-stock leveraged Exchange-Traded Funds (ETFs), are now working to introduce “emergency action authority.” The main focus is to allow, as in Hong Kong, a reduction in leverage ratios to 1.5 times, 1.1 times, or to impose investment restrictions, should volatility in the stock market rise sharply. On the first day the minimum deposit was increased to 30 million won in cash, both the trading volume and value of single-stock leveraged products declined, confirming that trading activities have contracted post-regulation.

"Will 1.5x, 1.1x Products Debut?" Hong Kong-style 'Variable Leverage' Under Review

According to the financial authorities on August 3, the Financial Services Commission is pushing to amend the Capital Markets Act to establish legal grounds for introducing market stabilization measures in emergency situations. The core of the amendment is to grant the authorities the power to flexibly adjust the leverage factor of single-stock leveraged products, which is currently fixed at two times. Until now, the authorities had maintained that lowering the leverage ratio runs contrary to the system's original intent and would require a general meeting of beneficiaries, making changes very difficult. However, given the increasing view that leveraged ETFs are a major driver of recent stock market volatility, the authorities have shifted their stance, seeing an urgent need for additional measures.

The Financial Services Commission is referencing the 'variable leverage structure' recently adopted by the Hong Kong Securities and Futures Commission (SFC). Last month, Hong Kong introduced a structure allowing the leverage or inverse multiplier of products to be adjusted daily, flexibly, within a maximum range of ±2x. Accordingly, from this month, leveraged products for Samsung Electronics and SK hynix listed in Hong Kong have their leverage factor determined for the next trading day based on the market conditions and risk profile of the previous business day.

Leveraged products for Samsung Electronics and SK hynix—first introduced globally by CSOP Asset Management—currently maintain the same 2x leverage ratio. However, if volatility increases above a certain threshold, the ratio could be reduced to 1.5x or 1.1x beginning the next trading day. While there has not yet been an actual adjustment to these ratios, the system now provides a flexible basis to implement such changes based on market conditions. Lee Eogwon, Chairman of the Financial Services Commission, recently stated in the National Assembly that, when Kim Hyun-jung, a lawmaker from the Democratic Party of Korea, raised the need for variable leverage, he replied, "Lowering the leverage ratio could be effective in terms of reducing volatility."

There is also keen interest as to whether trading restrictions or even suspensions will be included in future emergency powers. How the specific criteria for invoking these powers are shaped in the legislative process will be closely watched. So-called “Samsung Electronics-SK hynix (Samjeon-nix)” leveraged products have been criticized for increasing market volatility and effectively turning the domestic stock market into a virtual "gambling table." The first supplementary measure, focused on raising the minimum deposit, was announced on July 16. Additional measures released on July 29 included: restricting individual investment limits (such as capping the total investment amount at 20%), increasing trading-related fees such as excessive order charges, introducing simulated trading, and establishing legal grounds for stabilizing the market in emergencies.

However, some point out that flexibly adjusting the leverage ratio may introduce new risks for investors. Jin-young Kim, a researcher at Kiwoom Securities, explained, "Since leverage levels are determined by market conditions and capacity (operational limit) constraints, there is a risk that leverage could be lowered at a moment unfavorable to investors. For example, if the leverage falls from 2x to 1.5x just before a surge in the underlying stock, investors may fail to realize their expected returns. Even if the leverage is lowered, the unique path-dependency and compounding effect of leveraged ETFs remain in force."

Previously, Jae-kyu Bae, CEO of Korea Investment Management and known as the "father of ETFs," stated on Facebook, "It seems best for investors to gradually reduce positions through asset managers, liquidity providers (LPs), and modest institutional assistance, rather than by investors holding or facing delisting. Single-stock leverage ETFs should be left to expire naturally rather than being forcibly delisted."

First Day of 30 Million Won Minimum Deposit... Sharp Drop in Volume and Value

Financial authorities are expected to review the impact of the recent minimum deposit increase and then calibrate the timing and strength of additional measures such as introducing emergency action authority. While the concentration of flows into single-stock leveraged ETFs may ease somewhat in response to the higher deposit requirement, structural factors are likely to persist. The market sees the eventual trigger criteria for emergency authority and the predictability of market policies as key variables for mitigating volatility.

On the first day the minimum deposit was raised from 10 million won to 30 million won in cash, both the trading volume and value for single-stock leveraged products plummeted. According to the Korea Exchange and ETF Check, on July 31, the total trading volume for the 16 single-stock leveraged and inverse products was about 302.34 million units, with a trading value of about 3.05 trillion won. Compared to the combined trading volume of 1.22621 billion units and 12.4485 trillion won in trading value the previous day, it was only about a quarter. Relative to the average trading volume of 675.57 million units and trading value of 11.6787 trillion won per day from May 27 (when single-stock leveraged ETFs were listed) until the previous day, the decline is even more pronounced.

However, it is difficult to conclude the policy’s effectiveness based on a single day’s decline. Particularly since the timing of the deposit increase coincided with a sharp rally in semiconductor stocks, there is a need to observe the long-term impact of the regulations.

That day, in the market, some retail investors switched from single-stock leveraged products to "inverse" products, betting on a downturn as they took profits. The top net sell position by retail investors was KODEX SK hynix Single Stock Leverage (587.9 billion won). KODEX Samsung Electronics Single Stock Leverage also placed fourth, with 215.6 billion won in net sells. On the net buying side, KODEX 200 Futures Inverse 2X (371.5 billion won) ranked first, followed by KODEX Inverse (111.1 billion won).

An asset management firm source commented, "The increase in the deposit requirement likely limited new retail investors from entering the market. At the same time, increased intraday volatility probably caused a temporary decline in liquidity." They added, "With the surge in the broader market, investment capital may have shifted from the main stocks and single-stock leverage to other leveraged products."

As successive supplementary measures are announced, experts stress the need for a balanced approach. One capital markets expert, speaking on condition of anonymity, said, "Trust is at the core of markets. This situation has arisen because leveraged products were launched too hastily, without sufficient review. Solutions should be sought from a long-term perspective."

This content was produced with the assistance of AI translation services.