South Korea Grapples with Leveraged ETF Volatility, Banks Use ‘Crash Puts’
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South Korea Grapples with Leveraged ETF Volatility, Banks Use 'Crash Puts'
- South Korean regulators have implemented stricter rules on leveraged single-stock ETFs, including raising minimum cash deposit requirements from 10 million won to 30 million won, to curb speculative trading and market volatility.
- These measures, enacted starting July 31, 2026, followed emergency meetings by South Korea's financial authorities, including Finance Minister Koo Yun-cheol, who acknowledged that the products were approved "too hastily".
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South Korea is actively addressing significant market volatility attributed to the rise of leveraged single-stock Exchange Traded Funds (ETFs). These ETFs, introduced in May 2026, aim to double or triple the daily returns of individual stocks, particularly those of semiconductor giants Samsung Electronics and SK Hynix. However, their daily rebalancing mechanism can amplify both gains and losses, contributing to extreme market swings.
The increased volatility has led South Korean financial authorities, including the Ministry of Economy and Finance, the Financial Services Commission, and the Financial Supervisory Service, to hold emergency meetings and implement new regulations. Starting July 31, 2026, the minimum cash deposit for trading single-stock leveraged ETFs was raised from 10 million won to 30 million won (approximately $20,800 USD), and the eligibility to use securities as margin collateral was eliminated. Regulators are also considering capping individual investor holdings at 20% of their total portfolios and temporarily suspending new listings of such products. Finance Minister Koo Yun-cheol has publicly expressed regret over the initial approval of these products.
In response to the heightened risk, banks involved in providing leverage for these ETFs are reportedly offloading their exposure through “crash puts,” also known as cliquets or stability notes. These exotic derivatives allow banks to transfer the tail risk associated with drastic, single-day stock price drops to other institutional investors, such as hedge funds, who earn high premiums for assuming this risk. This surge in demand for crash protection highlights concerns about the potential for significant losses if a stock experiences a severe downturn, even with market circuit breakers in place.
The South Korean stock market, particularly the KOSPI index, has experienced a sharp decline, falling approximately 40% from its peak in June 2026, wiping out trillions in market value. This downturn has disproportionately affected retail investors, with over 1.2 million accounts reportedly facing margin calls. While the new regulations saw a 75.3% drop in trading volume for single-stock leveraged ETFs on their first day of implementation, analysts question whether these measures will be sufficient to fully stabilize the market. Some warn that tighter domestic rules could push retail demand for leveraged products to overseas markets.