South Korea bans new single-stock leveraged ETFs to curb volatility

South Korea’s Financial Services Commission (FSC) announced a temporary ban on new listings of single-stock leveraged exchange-traded funds (ETFs) tied to major technology firms, aiming to stabilise market conditions that have been exacerbated by intense retail speculation. The regulator stated it will halt new listings until market volatility subsides, marking a significant policy pivot following the approval of domestic leveraged ETFs linked to Samsung Electronics and SK Hynix in late May.

To restrict access to these high-risk instruments, the FSC will raise the minimum cash balance required for retail investors to trade single-stock leveraged ETFs from 10 million won to 30 million won ($20,300). This new threshold, which applies to both domestic and foreign-listed products, takes effect on 5 August. The move targets the surge in borrowed investment by retail investors, which reached a record 60 trillion won ($40.39 billion) by the end of May, driven largely by the popularity of these leveraged products.

Asset managers will also face new obligations to manage pricing disparities associated with these funds. The FSC mandated that broker-dealers and asset management companies retain qualified liquidity providers (LPs) and hold them accountable for managing price gaps. Byun Je-ho, director general for the capital markets team at the FSC, explained that asset managers are being held responsible because they are in the position to hire quality LPs to better manage these disparities.

The intervention comes as the KOSPI index plunged more than 6% on the day of the announcement, entering bear market territory, although it remains the best-performing major equity market for the year. Politicians and investors have blamed the frequent and large rebalancing trades required by leveraged ETFs for increasing market volatility. These funds use derivatives to replicate bets made with borrowed money, creating trading activity that can exceed real investor flows and exposing participants to sharper losses.

Market strategists have reacted to the regulatory shift with a mix of relief and caution. Inki Cho, a senior financial market strategist at Exness, described the FSC’s intervention as overdue and a correction of a known policy error. However, he warned that aggressive measures could trigger a rush to exit ahead of implementation, potentially amplifying the very volatility the regulator seeks to fix, though he noted the move would likely be a net positive for market credibility in the long term.