South Korea Weighs Capping Retail Bets on Samsung, SK Hynix Leveraged ETFs at 20%

Emergency market review meeting after stock selloff

Repeat excessive orders to face additional charges

Legal basis to be prepared for leverage-ratio adjustments

South Korea plans to impose a total-exposure cap on retail investment in single-stock leveraged exchange-traded funds tied to Samsung Electronics Co. and SK Hynix Inc., products the government has identified as a source of rising stock-market volatility. The move follows an earlier decision to raise minimum deposit requirements and adds to restrictions after criticism that the products have amplified swings in local equities.

Deputy Prime Minister and Finance Minister Koo Yun-cheol, Bank of Korea Governor Shin Hyun-song, Financial Services Commission Chairman Lee Eok-won, Financial Supervisory Service Governor Lee Chan-jin and presidential senior secretary for economic growth Ha Joon-kyung held an emergency market review meeting, known as the F4 meeting, at the government complex in Seoul on July 29 to discuss responses to increased stock-market volatility.

The centerpiece of the new package is a cap on each retail investor’s exposure to single-stock leveraged products. In practice, that would limit how much of an individual’s total investment portfolio can be allocated to those products. The government said the final threshold will be set later and gave a cap of 20% as an example. Retail investors currently can put all of their investment funds into single-stock leveraged products.

The government is also pursuing a plan to charge higher trading costs to investors who repeatedly place excessive orders. It would extend to single-stock leveraged products an excessive-quote surcharge already used in the futures market. Separately from the investor education now required, authorities will introduce a simulated-trading program.

They also plan to establish a legal basis for financial authorities to adjust leverage ratios when markets swing sharply, similar to Hong Kong’s variable leverage model. That would allow regulators to cut a 2x leveraged product to 1.5x depending on market conditions. The new measures will be pursued immediately, with details and the implementation schedule to be set in consultation with relevant agencies and the industry, a Financial Services Commission official said.

The government moved to add restrictions after recent declines in South Korean stocks became more pronounced than in major markets.

Previously announced measures, including higher minimum deposit requirements, will also proceed as planned. Starting July 31, investors seeking to make additional purchases of single-stock leveraged products must post 30 million won ($21,700) in cash as a minimum deposit. The rule will apply to overseas as well as domestic single-stock leveraged products.

Lee Sun-a / Shim Woo-il, Hankyung.com reporters suna@hankyung.com