South Korean authorities are preparing tighter controls on leveraged investment products after a two-day stock-market fall erased a large share of the KOSPI’s recent gains. The benchmark index dropped as much as 12.6% on Wednesday before recovering part of the loss and closing 6% lower, following a decline of nearly 11% on Tuesday.
The sell-off has put Seoul’s market on course for its worst monthly performance on record. The KOSPI is now almost 40% below the peak it reached little more than a month ago, when enthusiasm for semiconductor companies and artificial-intelligence investment was driving strong demand for Korean shares.
Chip rally reverses as leveraged positions unwind
Technology and chip stocks were among the main sources of pressure. Companies that had attracted the most aggressive leveraged buying during the AI-led rally suffered particularly heavy losses as investors reduced risk and were forced to close positions.
Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong, said the steepest declines were concentrated in shares with the greatest amount of leverage. He cautioned that it was difficult to identify when the sell-off would end and said the trade was no longer attractive under current conditions.
The turbulence was not limited to investors holding rising technology stocks. Jon Withaar, a senior portfolio manager at Pictet Asset Management in Singapore, described signs of panic and forced position-closing across Asian technology markets. In Japan, heavily shorted companies including Nintendo and Sony rallied, creating losses for traders who had bet against them.
Despite the sharp correction, the KOSPI remained 41.5% higher in US dollar terms for the year, making it the strongest-performing major market over that period. That contrast shows how rapidly the earlier rally developed and how much volatility remained embedded in share prices.
Government targets single-stock leveraged funds
Finance Minister Koo Yun-cheol faced questions from lawmakers over the role of single-stock leveraged exchange-traded funds. He apologised for the way the products were introduced and said their consequences had not been considered carefully enough.
Leveraged ETFs use financial instruments to multiply the daily movement of an underlying asset. They can produce larger gains when a share moves in the expected direction, but losses can also accelerate when the market reverses. Analysts have linked the rapid growth of these products to the amount of borrowed and amplified exposure in Seoul’s market.
Koo met the governor of the Bank of Korea and the heads of financial regulatory agencies on Wednesday to discuss the market disruption. Their talks came two weeks after a July 16 meeting that produced an initial set of restrictions intended to cool the leveraged ETF boom.
Further safeguards under consideration
The Ministry of Finance said it would move quickly on additional limits for single-stock leveraged products. Options include restricting how much an individual can allocate to them, with a possible ceiling of 20% of an investor’s total portfolio. Officials are also considering higher trading costs and mandatory simulated-trading experience before customers can buy the products.
The government plans to establish a legal framework for emergency market-stabilisation measures as well. Such authority would give regulators clearer tools to respond if forced selling, liquidity problems or extreme volatility threaten the broader financial system.
Officials now face a balance between containing risks and avoiding measures that could deepen the decline. The market’s strong year-to-date return suggests that long-term investor interest has not disappeared, but the speed of the reversal has increased pressure for safeguards around products that magnify short-term price movements.
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