South Korea Imposes Curbs on Leveraged ETFs After $2 Trillion Market Rout

South Korean financial regulators have announced new curbs on leveraged investment products following a market rout that has erased $2 trillion in value, but analysts remain skeptical that the measures will be enough to quell extreme volatility. The move comes after the country's main stock index plunged approximately 40% in a month, inflicting heavy losses on retail investors.

Regulators Intervene Amid Market Turmoil

Following an emergency meeting on Wednesday evening, the Bank of Korea governor and heads of financial regulatory bodies said they would impose caps on individual investments in single-stock leveraged funds, according to a Reuters report. Regulators also plan to increase the trading costs for these exchange-traded funds (ETFs), which have been identified as a key driver of both the market's recent rally and its subsequent collapse.

The intervention targets a crisis that has disproportionately affected individual investors, many of whom used borrowed funds to enter the market at its peak. The sell-off has occurred despite enormous earnings from corporate giants like Samsung Electronics and SK Hynix, which reported a combined 150 trillion won ($100 billion) in quarterly profit.

Analysts Question Efficacy of New Curbs

Market participants have expressed concern that the new rules may not go far enough to stabilize the market. Analysts noted the measures do not target the scale of the ETFs' leverage itself, a step taken by regulators in Hong Kong on July 23.

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"The measures will help ease volatility in the Korean stock market, but introducing a liquidity put, such as a market stabilisation fund, would have a greater effect," said Kim Jin-wook, an economist at Citi Korea, in comments to Reuters.

An analyst at a Seoul brokerage, speaking anonymously to Reuters, argued the cap is unlikely to work effectively. The analyst pointed out that the new rules do not require existing investors to sell their holdings and will not affect similar leveraged products listed on foreign exchanges.

Public Backlash and Political Pressure

The severe market downturn has fueled public anger, leading to protests outside the National Assembly building in Seoul where demonstrators laid condolence wreaths. One message on a wreath read, "Slaughtering retail investors."

Amid the pressure, South Korea’s Finance Minister Koo Yun-cheol apologized before lawmakers on Wednesday. He stated he was sorry for introducing the leveraged products without "careful consideration."