The Bank of Korea warns that the surge in overseas derivatives linked to chip stocks is amplifying volatility in the domestic market.

In its semi-annual monetary policy report, the Bank of Korea made a rare mention of overseas hedge funds, warning that overseas derivatives linked to South Korean chipmakers are expanding at an unprecedented rate and could further amplify volatility in the domestic market. Beneath the surface of the AI semiconductor investment boom, highly leveraged funds are becoming a new variable in the volatility of the South Korean stock market.

The report specifically names Situational Awareness, a US-based hedge fund focused on artificial intelligence, stating that it reportedly used up to 4 times leverage when building and unwinding positions in global memory chip companies, and listed it as a factor that exacerbated the volatility of the market crash in July.

This leverage structure is being amplified by record inflows of overseas funds: BlackRock’s U.S.-listed Korea ETF attracted a record $2.8 billion in a single week in July, while the market value of a Hong Kong-listed leveraged ETF tracking Samsung Electronics and SK Hynix surged more than 20 times in the first half of the year.

More alarmingly, the risks have begun to spill over – an unusual transaction involving SK Hynix in July triggered a liquidation of nearly $60 million in the offshore crypto market, highlighting that leveraged products linked to South Korean chip stocks have created cross-market risk transmission.

In addition to the three main drivers, hedge fund leverage was specifically mentioned.

In its semi-annual monetary policy report submitted to the National Assembly, the Bank of Korea pointed out that the concentration of semiconductor stocks in the South Korean market, the rebalancing of foreign investment portfolios, and the accumulation and de-leveraging of domestic leverage jointly drove the unprecedented volatility of the KOSPI from January to July this year.

The role of overseas hedge funds was mentioned separately. The report stated that these funds established and unwound large leveraged positions in South Korean chip stocks during the July market crash, exacerbating market volatility; the central bank specifically named Situational Awareness as an example, stating that the fund reportedly used up to 4 times leverage when establishing and unwound positions in global memory chip companies.

In addition, global investment banks traded South Korean spot stocks, futures, and options when hedging total return swaps between hedge funds and ETF managers, an action the central bank said clearly amplified the volatility of domestic stock prices.

Record inflows and a surge in leveraged ETFs

The central bank's warning comes as overseas demand for products linked to South Korean chipmakers is surging. About a quarter of the holdings in BlackRock's U.S.-listed South Korea ETF are in SK Hynix, and the ETF attracted a record $2.8 billion in a single week in July.

The central bank pointed out that this type of growth is creating more channels for overseas funds to influence the South Korean domestic market. In the offshore market, the market value of Hong Kong-listed leveraged ETFs tracking Samsung Electronics and SK Hynix surged more than 20 times in the first half of the year.

Abnormal transactions trigger crypto liquidation

The Bank of Korea did not cite specific cases in its report, but an unusual transaction by SK Hynix in July triggered a liquidation of nearly $60 million in the offshore crypto market, highlighting the rising cross-market risks associated with leveraged products linked to South Korean chip stocks.

This spillover occurred against the backdrop of sharp fluctuations in the South Korean stock market. From July 28 to 29, the KOSPI fell sharply for two consecutive days—by more than 10% and nearly 6% respectively—and triggered the circuit breaker mechanism. Approximately 350,000 to 460,000 leveraged accounts were forcibly liquidated by brokerages, and retail investors suffered a cumulative loss of about 56.3 trillion won on leveraged ETFs.

Faced with this situation, the Bank of Korea called for strengthened monitoring of overseas derivatives related to South Korean chipmakers. The concentrated deleveraging of leveraged products has exacerbated market liquidity pressures and made the regulators' previous reflection that "allowing the listing of leveraged ETFs for single stocks was too hasty" all the more pressing.

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