Government intervention triggered a sharp reversal in South Korean equities, with the KOSPI index erasing steep losses to close in positive territory. On July 14th, the market experienced rollercoaster swings, as the KOSPI index initially plunged more than 5% before rapidly recovering. The benchmark ultimately closed up 0.73% at 6,856.83 points.
According to reports, South Korea's financial regulators are scheduled to hold a high-level meeting to address the risks associated with single-stock leveraged exchange-traded funds (ETFs). The meeting is expected to involve officials from the Ministry of Economy and Finance, the Financial Services Commission, the Financial Supervisory Service, and the Bank of Korea, operating within the existing "F4" macroeconomic and financial policy framework.
Recent heightened volatility in the South Korean market has drawn increasing scrutiny from both regulators and participants towards these leveraged ETFs. Many view these products as a significant driver behind the wild price swings.
Informed officials indicated that regulators have been coordinating internally on potential solutions in recent days, though a definitive policy direction has not yet been finalized. Market discussions have centered on possible measures such as raising margin requirements, imposing daily price limits, or adjusting leverage ratios. However, regulatory officials reportedly believe such steps might only offer temporary relief and are unlikely to resolve the underlying structural issues causing market turbulence.
Industry-compiled data shows that over a dozen leveraged ETFs tracking Samsung Electronics Co Ltd and SK Hynix Inc, which launched in late May, have seen their prices nearly halve. The largest of these, the "SAMSUNG KODEX SK Hynix Single Stock Leverage ETF," has fallen approximately 45% since its debut and is down more than 60% from its June peak.
Data from the Financial Supervisory Service reveals that forced liquidations across the market reached 344.2 billion won in a single day, the largest such credit-related sell-off this year. As of July 13th, over 1.2 million leveraged retail accounts had hit margin call levels, with between 320,000 and 360,000 of those accounts fully liquidated by their brokers, wiping out investors' principal and, in some cases, leaving them in debt to their brokerage firms.
Institutional analysis suggests that the short-term "Gamma" effect from leveraged short positions in South Korea has not yet dissipated, indicating that massive selling pressure from leveraged positions has not been fully exhausted. The current downturn is viewed not as a fundamental reversal for the industries involved, but rather as a concentrated deleveraging event following a period of excessive positioning.
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