Raising the Bar! Korean Brokerages Discuss Hiking Minimum Deposit Requirements for Chip Stock Leveraged ETFs

The South Korean financial industry is seeking to tighten entry barriers for chip stock Leveraged ETFs to address the risks of market volatility and investor losses triggered by these products.

According to a Bloomberg report on Wednesday, the Korea Financial Investment Association stated that CEOs of the country’s 10 major asset management companies held discussions on launching investor protection measures for single-stock Leveraged ETFs, with core topics including raising minimum deposit requirements and staggering daily rebalancing trading times. Participants unanimously agreed that it is necessary to increase the minimum deposit requirement for investing in such leveraged products from the current level of 10 million South Korean won (approximately $6,714).

These discussions come against the backdrop of more than ten leveraged ETFs tracking Samsung Electronics and SK Hynix, whose prices have nearly halved since their listing in late May, resulting in heavy losses for investors and rising calls for stricter regulation of such high-risk products.

Significant Drawdowns Expose Risks

The performance of related Leveraged ETFs since their listing has caused substantial losses for investors. Data shows that the prices of more than ten leveraged ETFs tracking Samsung Electronics and SK Hynix have fallen by nearly half since their listing in late May.

Among them, the largest product, SAMSUNG KODEX SK Hynix Single Stock Leverage, with assets under management of approximately $3.4 billion, has dropped about 45% since its launch, with a decline of over 60% from its June peak.

These significant drawdowns have concentratedly exposed the inherent risks of leveraged investments in South Korea’s two chip giants. Since issuers typically need to buy high and sell low to maintain the leverage ratio promised by the funds, such products may not only amplify investor losses but also further exacerbate price volatility during market fluctuations.

Large-Scale Rebalancing Trades Impact Market Stability

In addition to investor protection, the impact of daily rebalancing trades on the market has also drawn industry attention. Citing data from the Korea Capital Market Institute, the Korea Financial Investment Association stated that since the launch of the relevant Leveraged ETFs, the daily stock trading volume required for rebalancing is estimated to be between 700 billion and 2.1 trillion South Korean won.

Currently, rebalancing trades are concentrated in the period before the market close, creating a concentrated impact on market prices. In response, various asset management companies stated that efforts are needed to spread rebalancing activities across different time slots of the trading day to smooth out their impact on the market. Participants also pointed out that it is necessary to further strengthen the market stabilizer role of liquidity providers to alleviate liquidity pressure during extreme market conditions.

Based on the results of these discussions, the South Korean asset management industry plans to strengthen risk control for single-stock Leveraged ETFs from multiple dimensions. On the access side, by raising minimum deposit requirements to screen for investors with stronger risk tolerance; on the trading side, by staggering rebalancing time windows to reduce the concentrated impact on the secondary market; and on the market mechanism side, by focusing on enhancing the buffering function of liquidity providers during extreme market conditions. Currently, the above measures are still under discussion, and specific plans await further clarification.

Risk Warning and Disclaimer

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