South Korea's financial authorities are considering stricter position limits on individual stock leveraged products, as they escalate regulatory measures beyond earlier tightened entry barriers.
According to reports, Financial Services Commission (FSC) Chairman Lee Bok-hyun chaired a meeting on the 28th, stating that if the strengthened initial deposit requirements effective July 31st fail to adequately cool the market, additional regulations will be introduced. The primary proposal under review is to cap individual investment in leveraged stock products at 20% of their total financial investment portfolio.
The regulatory signals from this meeting are more stringent than the first set of measures announced on the 16th. Chairman Lee also stated, "If demand does not sufficiently subside, we will proactively study and prepare additional measures."
These statements come amid a rapid expansion of the individual stock leveraged market, which has seen its total market capitalization surge by over 170% in less than two months since its launch on May 27th. The authorities had already implemented measures on July 31st, including raising the cash deposit threshold to 30 million won, but the effectiveness of these policies remains to be seen. For investors holding these products, the expectation of further tightening could persistently suppress trading activity.
20% Position Limit: The Core Strategy for Total Asset Management
Under the specific plan being studied, if an investor's total financial investment products amount to 100 million won, they would be limited to allocating a maximum of 20 million won to a single individual stock leveraged product. This "total asset management" mechanism aims to control individual investors' concentrated exposure to high-risk leveraged products at the portfolio structure level.
Regarding entry conditions, the authorities are simultaneously studying several supplementary measures. These include requiring pre-trade simulation tests, currently applicable to futures, derivatives, and short selling, for individual stock leveraged products. They also propose adding mandatory periodic re-education requirements and a prerequisite investment experience threshold.
Whether these additional measures will be implemented depends on the market's reaction following the July 31st new rules.
Direct Intervention in Rebalancing Timing and Liquidity Provision
Beyond the investment cap, Chairman Lee also outlined two specific requirements for market mechanism operations.
First, targeting asset management firms, he noted that the rebalancing operations of individual stock leveraged products are currently concentrated near the market close, risking amplifying volatility during that period. He urged the industry to disperse rebalancing activities throughout the trading day. While acknowledging that earlier rebalancing could increase fund return uncertainty and tracking error, he argued it would help reduce closing price volatility and predictable trading by other investors, ultimately benefiting the stability of fund returns.
Second, addressing liquidity providers (LPs), Chairman Lee pointed out that some individual stock leveraged products have over 20 LPs, leading to increased trading volume and arbitrage that artificially inflates market size. He stated that introducing uniform regulations for a dynamically changing market is challenging, instead calling on LPs to voluntarily adjust bid-ask spreads, order sizes, and order frequency to reduce unnecessary transactions and maintain market stability.
Background of Escalating Oversight: Market Capitalization Surges Over 170% in Two Months
This continuous wave of regulatory pressure stems directly from the explosive growth of the individual stock leveraged product market.
According to earlier reports, these products were launched on May 27th, initially covering 16 underlying stocks with a combined market capitalization of 4.4 trillion won. By July 15th, the market cap had soared to 11.9 trillion won, an increase of over 170% in less than two months. Average daily trading volume also rose from 10.4 trillion won on the launch day to 13 trillion won by July 15th.
Faced with this growth, the FSC, Financial Supervisory Service, Korea Exchange, and Korea Financial Investment Association jointly acted. They merged two measures originally scheduled for phased implementation in August—raising the minimum cash deposit for retail investors from 10 million won to 30 million won, and removing the eligibility of collateral securities like stocks, ETFs, and bonds—and brought them forward to be implemented simultaneously on July 31st. These products cover domestic stocks like Samsung Electronics and SK Hynix, as well as overseas individual stock leveraged ETFs and ETNs targeting companies like Tesla and Nvidia.
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