Assets Under Management Surge 380-Fold in a Year: "This Is Why the KOSPI Is Volatile," BIS Issues Dire Warning

BIS Report Spotlights Korea as an Extreme Case

Risks Concentrated in Two Stocks Dominating the Index

A 10% Drop Could Snowball to 14%

Bank of Korea Warns of Deepening Market Concentration

Regulators Tighten Oversight

The Bank for International Settlements (BIS) has issued a warning that leveraged products invested in Samsung Electronics and SK hynix are increasing the volatility of the domestic stock market.

The after-market opened on the 14th at the Korea Exchange in Yeouido, Seoul. Korea Exchange (KRX) will operate the after-market for the KOSPI and KOSDAQ markets from 4 p.m. to 8 p.m. starting on this day. Yonhap News

According to the BIS Quarterly Review published in September, the assets under management of leveraged products based on Samsung Electronics, SK hynix, and U.S. Micron were less than USD 100 million (about KRW 135 billion) as of mid-last year. However, by June this year, the figure had surged to over USD 38 billion (about KRW 51 trillion), marking at least a 380-fold increase within just over a year.

Leveraged products differ in structure from conventional instruments that simply track the movement of stock prices. For example, “2x leveraged” products are designed to deliver almost double the return if the underlying stock rises 5% in a day, and similarly, double the loss if it falls 5%. In order to maintain this ratio, additional shares must be purchased as prices rise and sold as they fall. This structure amplifies upward momentum in bull markets and downward momentum in bear markets.

Korea Highlighted as an Extreme Case..."Half of Turnover from Samsung Electronics and SK hynix"

BIS singled out South Korea as an extreme example of leverage-focused investment in its global stock market analysis. The backdrop to BIS’s focus on Korea lies in the concentration of trading volume between the two stocks. The combined share of Samsung Electronics and SK hynix in domestic stock market turnover averaged about 12% last year but surpassed 50% by mid-this year. This means that, at one point, over half of all transaction money in the local stock market was concentrated on these two stocks.

Funeral wreath calling for the delisting of single-stock leveraged ETFs placed in front of the National Assembly in July. Photo by Yonhap News Agency

As the scale of leveraged products expands, mechanical trading has now reached levels that can significantly affect prices. BIS estimated that if SK hynix’s share price moves by 10% in a day, the buying or selling required by leveraged funds, according to this movement, would amount to approximately USD 5 billion (about KRW 6.7 trillion) as of June this year. Since SK hynix’s daily trading volume is slightly below USD 10 billion (around KRW 13 trillion), on days with substantial price movements, up to half of the daily trading may be attributed to such ratio adjustments.

This can increase the amplitude of price fluctuations. BIS analyzed that when SK hynix’s share price moves 10%, trading by leveraged funds can widen the fluctuations by an additional 2 to 4 percentage points. If other factors coincide, such as simultaneous selling from leveraged products during a 10% decline, the price could fall as much as 12 to 14%. However, BIS noted these are estimates calculated using financial models, not actual daily results.

"Visible Risks Are Just a Fraction"... Options, ELS Also Highlighted

Some commentators point out that the problem is not limited to leveraged exchange-traded funds (ETFs). The open interest ratio of call and put options betting on SK hynix’s share price increase grew roughly 30 times between March and June this year, at one point coming close to 100, while the comparable figure for Micron remained below 1 during the same period. To hedge their risks, securities firms selling call options have to buy stocks as prices rise and sell as they fall. When leveraged ETFs and options move in the same direction, market volatility can be amplified even further.

The volume of structured products such as equity-linked securities (ELS), also based on these two stocks, increased sharply in the first half of this year. BIS commented, “When these products are taken into account, leveraged ETFs represent only the visible portion of the risk piling up in the market.”

BIS further emphasized, “What differentiates Korea is that a handful of products are concentrated on two stocks that dominate the index.” It warned that if the scale of leveraged products becomes excessively large compared to the trading volume of underlying stocks, mechanical trading could amplify price swings.

Similar assessments have also been made domestically. On September 10, the Bank of Korea stated in its Monetary and Credit Policy Report, “If leveraged ETF funds are concentrated in Samsung Electronics and SK hynix, market concentration may intensify and price volatility may increase.” The financial authorities have already begun implementing regulations. In June, Lee Chanjin, Governor of the Financial Supervisory Service, expressed regret that the authorities failed to block the listing of single-stock leveraged ETFs, noting the growing downsides. In July, the government imposed a cap, limiting individual investors’ investments in single-stock leveraged ETFs to 20% of their total assets.

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