The Central Bank of Korea has issued a stronger warning to the single-share leverage ETFs of Tristar Electronics and SK Hercules that such products could magnify stock price volatility and further increase the concentration of South Korean stock on a few semiconductor stocks. As the central bank openly moves towards a more cautious stance, the expectations of Korean regulators to tighten the relevant product thresholds are rising.

Central bank language is clearly stronger.

The Central Bank of Korea made this statement in response to a written inquiry from members of the National Forces Party. According to the Central Bank, such ETFs may reinforce unilateral transactions. When capital flows are concentrated or outflows, market volatility may be further magnified. In the event of a significant decline in the price of the target shares, the foreclosure and rebalancing operations of ETF may also expand the bulk losses and channel them to a wider range.

This statement is clearly stronger than the statement in the Financial Stability Report of the Central Bank of Korea on June 24. On the other hand, the Central Bank of Korea also mentioned that the introduction of relevant products would help to provide domestic alternatives, reduce capital outflows and attract some foreign investment into the Korean market.

I'm worried about the weight of the semiconductor.

The Central Bank of Korea noted that, as the semiconductor industry improved its profitability, the Korean stock market ' s reliance on a few chips was increasing. The combination of Samsung Electronics and SK Hercules has already accounted for a high share of the market value and trade in Korean stock markets, and single-share leverage ETF may further strengthen this concentration.

Unlike the KOSPI 200 or the KOPI 500 wide-based leverage ETFs, these products directly provide double-divide openings for a single share, are faster in volatility, and are more likely to scale up trading behaviour at the up and down stages.

  • The Korean financial authorities approved the first products on May 27th.
  • Local issuers have launched 16 single leverages only
  • 14 of them, only products.

Surveillance tightens the expected warming.

The President of the Korea Financial Supervisory Authority, Lee Chan-jin, had previously publicly expressed regret at the approval of such products and stated that the advance had been too hasty. The fact that the Central Bank of Korea is now on the alert means that the regulatory debate is moving from cautious observation to a clearer tightening of expectations.

Market research institutions also noted the rapid influx of funds. According to Shin Mangong, since May Korea has two times more ETF inflows than other leverage products and regular ETFs. Historically, in 2017 and in 2021, the size of the leverage ETF also rose in reverse.

In order to maintain target leverage, such products usually continue to be bought as stock prices rise, sold as they fall, and are therefore inherently procyclical. If Samsung Electronics and SK Hercules follow-up performance continues to drive large-scale stock price fluctuations, the associated ETF trade magnification effects will also be of greater interest.

Market focus on financial windows

At the time of the regulatory controversy, the market was awaiting the release this week of the second quarter performance by Samsung Electronic. In the recent past, the volatility of Samsung electronics and SK Hercules stock prices has increased, and if the financial results continue to drive the chip plate mood, the trade heat associated with semiconductor-related ETFs is likely to increase further and will also allow regulators to advance further restrictions more quickly.