South Korea fast-tracks leveraged ETF deposit rule to 30 million won

South Korea's financial regulator tripled the minimum cash deposit for single-stock leveraged ETFs to 30 million won after President Lee Jae-myung publicly rebuked the pace of its response to market turmoil.

South Korea's Financial Services Commission accelerated a 30 million won minimum cash deposit for single-stock leveraged ETFs to end-July, after President Lee Jae-myung rebuked regulators for moving too slowly to curb volatility that sent the KOSPI down 5.72 percent in a single session.

"We will continuously monitor market conditions, and if stability is not achieved, we will review additional measures," the FSC said in a statement, without specifying what further steps could follow.

The new rule, effective July 31, requires individual investors to hold at least 30 million won ($20,330) in cash — triple the previous 10 million won threshold — to make new or additional purchases of domestic or overseas single-stock leveraged ETFs and ETNs. The regulator also suspended new listings of such products and barred securities firms from marketing them. The KODEX SK Hynix Single-Stock Leveraged ETF plunged 16.25 percent on July 24, while the KODEX Samsung Electronics Single-Stock Leveraged ETF tumbled 15.10 percent, as the KOSPI breached the 7,000 level. Samsung Electronics and SK Hynix, which together account for more than half of the KOSPI's market capitalization, have posted annualized volatility of 96 percent and 113 percent, respectively, since the products launched on May 27.

The crackdown puts the FSC in a bind: tighten too aggressively and risk driving retail investors — known as "Seohak ants" — toward unregulated overseas single-stock products or index-based three-times leveraged ETFs, a so-called balloon effect. Move too softly and fail to contain the volatility that has made the KOSPI the world's best-performing major index this year, with Samsung shares more than doubling and SK Hynix nearly tripling. The combined market capitalization of 16 single-stock leveraged products more than doubled to 11.9 trillion won ($8.1 billion) within two months of listing, as ETF managers were forced to mechanically buy and sell hundreds of billions of won in underlying shares near the market close to maintain target leverage ratios.

The accelerated timeline followed a Cabinet meeting on July 21, where President Lee rebuked the FSC after reviewing its proposed measures, saying "there are criticisms that this won't be enough" and ordering authorities to "swiftly and boldly implement the necessary countermeasures." The FSC had originally planned a phased rollout starting in August, but the timeline was compressed after the president's intervention.

The FSC is also tightening the criteria for deposit recognition. Previously, investors could sell stocks and have the proceeds immediately recognized as a deposit before settlement. Going forward, funds will only be recognized on the settlement date — two trading days later — when cash is actually deposited. Loans secured against sale proceeds are excluded from the deposit calculation, and securities firms are now banned from easing deposit requirements based on trading experience.

Additional measures remain under discussion. A plan to increase the minimum trading unit from one share to 20 shares, originally scheduled for November, is being fast-tracked but faces practical hurdles including a major overhaul of securities firms' trading systems and determining how liquidity providers will handle odd lots. A "rebalancing trade dispersion" measure is also being considered to address the concentration of rebalancing trades near the market close, though some asset managers say they are already dispersing trades ahead of closing prices.

Some hardliners have argued for reducing the leverage ratio from two times to 1.5 times, or delisting the products entirely. However, the FSC has pushed back, citing the difficulty of obtaining consent from existing investors and the risk that delisting could trigger even greater market turmoil. A Realmeter survey of 504 adults conducted on July 22 found that 63.7 percent of respondents viewed the product's introduction as a "wrong decision," while 59.2 percent said the FSC's supplementary measures were "not sufficient."

The regulatory shock has also rippled beyond South Korea. Kioxia, the Japanese NAND-flash manufacturer, closed at €294.00 on Friday, down 12.24 percent in a single session and 39.51 percent over the past 30 sessions, as the forced deleveraging cascaded across Asian semiconductor names. Market participants estimated a single-day value destruction of roughly $22.9 billion for the region's chip firms.

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