South Korea's FSC banned new single-stock leveraged ETF listings and tripled margin requirements to 30 million won, while the BOK unexpectedly hiked rates to 2.75%, creating a conflicting policy response to a leverage crisis that has wiped out 320,000 retail accounts and pushed the KOSPI into a bear market.
South Korea's financial regulator and central bank fired in opposite directions on Thursday — one trying to contain a leverage-fueled crash, the other tightening credit — leaving markets to absorb a policy mix that risks prolonging the pain.
South Korea's Financial Services Commission on Thursday unveiled six measures to rein in single-stock leveraged exchange-traded funds, including a ban on new listings, a tripling of the minimum margin requirement to 30 million won ($20,300) and a minimum trade size of 20 shares, effective from August. Hours earlier, the Bank of Korea raised its benchmark rate by 25 basis points to 2.75%, the first tightening in three and a half years, catching most economists off guard.
"The leverage built up in these products created a self-reinforcing downward spiral that we failed to stop in time," Lee Bok-hyun, governor of the Financial Supervisory Service, said in a briefing. "The measures are designed to prevent new leverage from entering the system, but existing positions will need to run their course."
The KOSPI fell 6.37% on Thursday to extend its decline from the June 24 record high to more than 20%, entering a technical bear market. SK Hynix Inc., the most heavily concentrated name in the leveraged ETF complex, plunged 11.53% to 184,200 won, bringing its peak-to-trough loss to 28.6%. Samsung Electronics Co. dropped 8.77% to 25,500 won. Forced liquidations on July 13 alone reached 344.2 billion won, the highest single-day total this year, as 320,000 to 460,000 retail accounts were fully wiped out, according to FSS data.
The policy contradiction is stark. The FSC is trying to slow the bleeding by capping new leverage, while the BOK's rate hike raises the cost of carrying existing margin debt and compresses equity valuations. Korea's margin loan balance stood at 34.7 trillion won as of July 14, down from a peak of 38.6 trillion won in late June but still well above the 27 trillion won level at the start of the year. At least 5 trillion to 7 trillion won of additional deleveraging is needed to return to normal, based on historical averages.
The Leverage Trap That Won't Unwind
The 16 single-stock 2x leveraged ETFs launched on May 27 were designed to let retail investors amplify exposure to South Korea's AI-driven semiconductor rally. Instead, they became the mechanism for its destruction. The products' daily rebalancing requirement — estimated at 700 billion to 2.1 trillion won per session, all concentrated in the closing auction — created what Goldman Sachs analysts described as a "self-reinforcing liquidation cascade" disconnected from fundamentals.
By July 15, the combined assets under management of the 16 ETFs had fallen to about 12.4 trillion won, halved from their June 25 peak. Critically, the decline came almost entirely from net asset value erosion rather than share redemptions, according to Huatai Securities analyst Li Yujie. The structural leverage remains in place — the algorithms keep rebalancing every day, and the positions keep compounding the downside.
Retail investors have not capitulated. The KODEX SK Hynix 2x leveraged ETF alone has attracted 4.73 trillion won in net retail buying since listing, with 1.55 trillion won of that coming after SK Hynix's peak on June 25. Only on July 14 and 15 did net selling emerge, totaling 474.4 billion won — a fraction of the accumulated position.
The Cash Buffer Is Gone
More troubling than the margin debt level is the depletion of retail cash reserves. Standby deposits in Korean securities accounts fell to 105 trillion won by July 10, down from 139.69 trillion won at the start of June — a decline of 34 trillion won, or about $25 billion, in just over a month. That money has either been lost to market declines or consumed by margin calls.
Korea's margin system allows leverage of up to 2.5 times with a minimum 40% initial margin. For Samsung and SK Hynix, where margin requirements sit around 45%, a 17.5% decline in the underlying stock triggers a margin call. With SK Hynix already down 28.6% from its peak, a large portion of leveraged accounts are already past the point of no return. China Merchants Securities analyst Li Haoyang noted that Korea's 40% minimum margin compares with 50% in the U.S. and 100% in China, leaving Korean retail investors with far less shock absorption.
The forced liquidation data confirms the acceleration. Monthly totals rose from 550.8 billion won in March to 707.7 billion in May and 1.12 trillion in June. The first 14 days of July alone saw 473.6 billion won in forced selling, putting the month on track to exceed 1.3 trillion won.
What Comes Next
Three conditions would signal the deleveraging is complete: margin debt stabilizing below 30 trillion won through genuine position unwinding rather than price declines, meaningful ETF share redemptions that shrink the rebalancing footprint, and a halt in the decline of retail standby cash. None of these conditions have been met.
The next catalyst is SK Hynix's second-quarter earnings, where any guidance miss on memory chip pricing would compound the mechanical selling with a fundamental repricing. The risk is amplified by external factors: New York state on July 14 signed a one-year moratorium on data center projects above 50 megawatts, cloud provider CoreWeave is exploring put options to hedge memory chip exposure, and Warren Buffett told CNBC on July 15 that stock markets have become "a casino attached to a church."
The BOK's next rate decision on Aug. 28 will test whether the central bank views the market dislocation as a financial stability risk worth addressing. For now, the policy mix suggests South Korea is willing to let the deleveraging play out — and the data suggests it is only 30% to 40% complete.
This article is for informational purposes only and does not constitute investment advice.
