South Korea Considers Capping Retail Investment in Leveraged ETFs Amid Market Turmoil

South Korean financial regulators are considering placing a cap on the amount retail investors can place in single-stock leveraged exchange-traded funds (ETFs), according to local media reports. The potential move signals growing concern over the risks associated with these complex products amid sharp declines in major technology shares.

Heightened Regulatory Scrutiny

Lee Eog-weon, chairman of the Financial Services Commission (FSC), stated that authorities would review and prepare additional measures to curb demand for leveraged ETFs if necessary, reports said on Tuesday. Speaking at a meeting with local asset managers and brokerages in Seoul, Lee specifically mentioned a potential cap on the total value of investments for each individual.

This consideration follows a recent move by the Korean regulator to increase the cash deposit required for retail investors to trade these instruments. Leveraged ETFs, which use derivatives to amplify the daily returns of an underlying asset, can lead to significant losses, particularly in volatile markets.

Market Volatility Prompts Action

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The increased regulatory focus comes as the underlying shares for some of the most popular leveraged products have experienced significant downturns. The ETFs in question are largely tied to South Korea's two largest semiconductor manufacturers, Samsung Electronics and SK Hynix.

On Tuesday, the market saw substantial sell-offs in these key stocks:

• Samsung Electronics (KS:005930) shares fell by as much as 9.7% on concerns over increased competition and financing risks related to AI infrastructure spending.
• SK Hynix (KS:000660) shares dropped as much as 11.2% in Seoul. The decline followed a 10% fall in its American Depositary Receipts on the Nasdaq on Monday, which took the price below its IPO level.