Leveraged ETF assets surged 431% in one year, South Korea’s National Assembly initiates regulatory reform discussions.

Leveraged ETF assets surged 431% in one year, South Korea’s National Assembly initiates regulatory reform discussions.

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After single-stock leveraged products were found to exacerbate market volatility and harm retail investors’ interests, the South Korean National Assembly will launch discussions on regulatory reform, with expectations of tightened regulations rising.

On July 3, according to the Korean "Herald Economy," the "Special Committee on High-Quality Capital Markets" under the Democratic Party of Korea will hold a closed-door internal review meeting on the 6th, officially launching discussions on capital market policies for the second half of the 22nd National Assembly.

A core member of the committee revealed that the committee is currently investigating the status of the leveraged ETF market, with the review covering multiple measures such as whether the products should remain and strengthening market access, and will further discuss with financial regulators.

The head of South Korea’s Financial Supervisory Service had previously commented publicly on the Samsung Electronics and SK Hynix single-stock leveraged ETFs, essentially admitting policy mistakes and suggesting the need to establish investor protection mechanisms. This statement is regarded by the outside world as a clear signal of a regulatory attitude shift toward such products.

Rapid expansion of product size, regulators issue early warnings

The single-stock leveraged ETFs for Samsung Electronics and SK Hynix were officially launched at the end of last year, initially intended to channel overseas securities investment demand back to the domestic market under a high exchange rate environment.

However, after launch, product size expanded rapidly, amplifying market volatility.

At a press conference last month, the head of the Financial Supervisory Service used strong language, stating:

The extremely high turnover rate of these products results in profits for brokerages, with real participants not benefitting; only management and operating systems profit from them.

The head of the Financial Supervisory Service said he was "personally deeply concerned" about this. This is so far the most direct criticism of leveraged ETFs by Korea’s top financial regulator.

A Democratic Party member also posted on social media calling on financial authorities to reassess the impact of single-stock leveraged products on the market, stating:

Actively study options to gradually reduce the influence of leveraged products, in order to protect individual investors and maintain market stability.

Internal consensus reached, reviewing product regulatory framework from scratch

The committee has reached a basic consensus on the necessity of tightening regulations on leveraged ETFs.

Another committee member compared leveraged ETFs to short selling, saying that "if leveraged ETFs cause the stock market to lose credibility, the overall strength of the capital market will be weakened," and clearly stated they will "review from scratch whether to introduce regulation or just partial supplementation."

The core judgment within the party is that the excessive concentration effect of leveraged ETFs may hinder the healthy development of the capital market.

Currently, with the semiconductor sector booming and large funds concentrated in Samsung Electronics and SK Hynix—amplified by greater price volatility—single-stock leveraged products are seen as further increasing these effects.

Committee background: main driving force behind capital market legislation

The committee was originally set up after the Lee Jae-myung administration took office to promote the "KOSPI 5000" target as a dedicated internal body within the party.

This February, as the Korea Composite Stock Price Index (KOSPI) successfully surpassed the 5,000-point threshold, the committee was formally renamed to its current name.

Subsequently, the committee has pushed for key legislative agendas such as rationalizing the price-to-book ratio (PBR), revitalizing the KOSDAQ (growth board) market, improving the regulatory framework for stablecoins, and introducing stewardship codes for institutional investors.

Currently, the committee has not yet made a decision on specific regulation of leveraged ETFs. Several procedural steps remain from internal investigation to formal legislation, and the attitude of financial regulators will be a key variable.

However, joint statements from party leaders and regulators have substantially raised expectations that these products will face more stringent restrictions.

For market participants, the regulatory direction of Samsung Electronics and SK Hynix-related leveraged ETFs is worth continued attention. If access thresholds are raised or product size is limited, corresponding underlying asset liquidity may change in the short term.

Risk DisclaimerThe market carries risks; investment should be cautious. This article does not constitute individual investment advice, nor does it take into account the special investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investment is at your own risk. ```