The South Korean government is moving to expand its emergency powers to directly adjust the terms of financial investment products amid a sharp decline in trading of single-stock leverage products following new regulations. This initiative aims to secure a legal basis for rapid responses to unpredictable market shocks, rather than merely regulating overheating in specific products after the fact.
According to financial authorities on August 30, the Financial Services Commission is considering amendments to the Capital Markets Act to allow changes to the structure or conditions of financial investment products, including single-stock leverage products, in situations requiring market stabilization and investor protection. While the current law provides some authority for regulatory orders, it lacks clear grounds for altering the content of financial investment products themselves. This indicates institutional limitations in making immediate changes to product structures or conditions, even when investor protection or market stability is necessary due to rapid market fluctuations.
If financial investment products are included under the emergency powers, it would enable swift adjustments to key product conditions based on market circumstances. For instance, it could allow for a reduction in the leverage ratio of single-stock products, currently set at two times, to prevent further volatility during periods of heightened market fluctuations or excessive capital concentration in specific stocks.
Concerns have been raised that single-stock leverage products could exacerbate market volatility due to concentrated trading by individual investors since their launch. In response, financial authorities have implemented gradual regulations by increasing entry barriers for these products.
The effects of these regulations are evident in trading volumes. According to the Korea Exchange and Koscom, individual investors sold a net total of 1.7731 trillion won worth of 16 single-stock leverage and inverse exchange-traded funds (ETFs) related to Samsung Electronics and SK Hynix from July 31 to August 28. This included a net sell of 1.2415 trillion won in SK Hynix-related products and 531.6 billion won in Samsung Electronics-related products.
This marks a stark reversal from the period before the regulations. From the launch of these products on May 27 until just before the regulations took effect on July 30, individual investors had net purchased 15.2876 trillion won worth of these products. In just over a month, the direction of investor funds shifted dramatically from net buying to large-scale net selling.
Trading volumes have also plummeted. The average daily trading volume from May 27 to July 30 was 11.6787 trillion won, but this month, it has dropped to just 1.0059 trillion won, less than one-tenth of the previous amount. To curb excessive volatility in single-stock leverage products, financial authorities raised the minimum deposit requirement from 10 million won to 30 million won starting July 31. Additionally, as of August 19, they mandated the completion of simulated trading, and further measures will be introduced in November to limit trading units to 20 shares.
Meanwhile, while the deposit regulations have helped stabilize supply and price volatility concentrated in specific semiconductor stocks, there is a balloon effect as investor demand shifts to other leverage products or overseas markets. This phenomenon of shifting investment demand could recur, which appears to be a key reason behind the expansion of emergency powers.
* This article has been translated by AI.
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