- The South Korean Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) are jointly drafting an amendment to the Financial Investment Services and Capital Markets Act. This amendment aims to introduce emergency action authority for the first time, allowing regulatory agencies to directly reduce the leverage ratio of single-stock leveraged ETFs from 2x to 1.5x or 1x during periods of extreme market volatility, without requiring a vote from the beneficiaries' meeting.
- This legislative amendment is a direct response to the recent severe fluctuations in the Korean stock market. At that time, South Korea opened 2x leveraged ETFs for stocks like Samsung Electronics (005930:KS) and SK Hynix (000660:KS), which led to a massive influx of retail funds. During the market downturn, mechanical rebalancing sell pressure amplified the downward volatility of the KOSPI and KOSDAQ indices, even triggering circuit breakers.
- The South Korean regulators are also considering several supporting measures, including setting a cap on individual leverage investment limits, raising the basic margin threshold, and implementing mandatory simulated trading for large traders. If the amendment is passed, South Korea will become the second financial market in Asia, after Hong Kong, to include leverage ratios in its immediate intervention toolbox.
Regulators to Gain Emergency Leverage Reduction Authority
The amendment promoted by the South Korean Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) aims to grant regulators direct intervention capabilities in extreme market conditions. Regulatory agencies can bypass the traditional beneficiaries' meeting vote to reduce the leverage ratio of single-stock leveraged ETFs from 2x to 1.5x or 1x. This move means that when the market experiences extreme unilateral trends, regulators can quickly cut off the negative liquidity feedback caused by leveraged products, reducing systemic market risk.
July Storm Prompts Institutional Reflection and Reform
In May, South Korea opened 2x single-stock leveraged ETFs tracking tech giants like Samsung Electronics (005930:KS) and SK Hynix (000660:KS), attracting a surge of retail funds. However, during the market correction, the mechanical rebalancing operations of leveraged funds to maintain fixed multiples amplified the selling pressure in the spot market, causing the KOSPI and KOSDAQ indices to trigger circuit breakers. Regulatory agencies acknowledged the previous insufficient risk assessment, leading to this defensive institutional transformation.
Three Lines of Defense to Build Retail Investment Thresholds
In addition to the emergency intervention mechanism, South Korean regulators also plan to establish pre-entry barriers. Related measures include limiting individual leverage investment positions to no more than 20% of total investments, raising the basic margin threshold from 10 million won to 30 million won, and requiring large traders to complete mandatory simulated trading. These regulations aim to limit the disorderly expansion of high-risk derivatives among retail investors and guide market funds back to rational allocation.
Asian Market Leverage Regulation Moving Towards a Framework
This South Korean legislative amendment draws on the flexible leverage regulation framework of the Hong Kong Securities and Futures Commission, which allows the target leverage of long products to be reduced to 1.1x in extreme market conditions. If the bill is successfully passed, South Korea will become the second market in Asia to incorporate leverage ratios into a dynamic adjustment toolbox. This indicates that regional regulatory agencies are accelerating the improvement of management mechanisms for high-volatility derivatives, and future leverage trading returns will be subject to stricter policy marginal constraints.
