South Korea's Democratic Party launches leveraged ETF review after 431% surge

South Korea's Democratic Party will scrutinize the regulatory framework for single-stock leveraged ETFs on July 6, after the products tracking Samsung Electronics and SK Hynix grew 431% in one year and drew criticism for pushing daily price swings wider.

"If leveraged ETFs breed distrust in the stock market, they weaken the capital market — isn't that similar to short selling?" a senior official at the party's Korea Premium K-Capital Market Special Committee said, adding the panel is "reviewing from scratch whether regulation is needed or whether minor adjustments will suffice."

The committee's review will examine options ranging from product bans to tighter market-entry requirements, according to a person familiar with the matter. Financial Supervisory Service Governor Lee Chan-jin has effectively acknowledged the policy failure of the single-stock products, saying their extreme turnover rates "are producing results that only fatten brokerages." Democratic Party lawmaker Lee Eon-ju called on financial authorities to "actively consider a phased reduction" of leveraged products' influence to protect retail investors.

The review targets products that channeled billions of dollars into Samsung Electronics and SK Hynix during a semiconductor boom, magnifying daily price swings in two stocks that together account for roughly a third of the KOSPI's market capitalization. Any regulatory tightening could reduce trading volumes and force an unwinding of leveraged positions, potentially adding to near-term volatility in South Korea's benchmark index.

From Policy Tool to Market Risk

The single-stock leveraged ETFs were introduced at the end of last year as part of a government effort to redirect investment demand from overseas markets back into domestic ones as the won traded at elevated levels. But the products' rapid growth — the leveraged ETF market expanded 431% on an annualized basis — and concentration in semiconductor stocks have turned them into a source of concern. The KOSPI's climb above 5,000 in February, driven in part by the semiconductor rally, has done little to ease worries that leveraged products are inflating a fragile rally.

The last time South Korean regulators tightened rules on leveraged products was in 2020, when the Financial Services Commission capped leverage ratios on derivative-linked funds after the COVID-19 crash triggered margin calls. That intervention reduced trading volumes in affected products by roughly 30% over the following quarter, according to Korea Exchange data.

Legislative Momentum Builds

The special committee, established after President Lee Jae-myung took office last year, was originally tasked with achieving a "KOSPI 5,000" target. After the index reached that level in February, the panel was renamed and shifted focus to broader capital market reforms, including normalizing price-to-book ratios, revitalizing the Kosdaq, and introducing a stewardship code for institutional investors.

The Democratic Party has demonstrated its ability to push through financial legislation. In the first half of the Assembly session, it amended the Commercial Act three times to enshrine duties of loyalty to shareholders, mandatory treasury share cancellation, and cumulative voting. A capital markets act amendment containing a "fair value" provision to prevent share price suppression in affiliate mergers remains pending at the bill review subcommittee stage.

The committee will hold a plenary meeting next week to discuss legislative strategy for the second half of the 22nd National Assembly. Financial authorities' cooperation will be a key variable in determining how quickly any new rules take effect.

This article is for informational purposes only and does not constitute investment advice.