One-sided sharp rise raises concerns about bubbles, global banks collectively tighten leverage bets on South Korea's two chip giants

According to informed sources, after the significant rise in global chip stocks this year raised concerns in the market about the risk of a pullback, several International Bancshares Corporation are tightening leverage bets by hedge funds on top Asian chip manufacturers - including SK Hynix and Samsung Electronics (SSNLF.US). Sources say that Citigroup, JPMorgan Chase, and Goldman Sachs Group, Inc. have increased the financing costs for hedge funds betting bullish on SK Hynix and Samsung Electronics through swap transactions. These banks have also tightened the size limits for new transactions and screened the eligible trading clients. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) has also faced similar measures. The sources also stated that Morgan Stanley has rejected requests from clients for new swap transactions on these two South Korean stocks, and some second-tier banks have also stopped accepting new orders in the past two weeks. A few large global banks that are still willing to take orders are doing so on a case-by-case basis. These measures come at a time when the stock prices of the two chip companies have experienced an extreme one-way rally this year, sparking concerns about a bubble in the global tech stock frenzy. SK Hynix's stock price has more than tripled this year, while Samsung Electronics has risen by over 175%. This performance has driven the Korean benchmark KOSPI index up by about 100%, making it the best performing market globally. However, chip stocks have recently begun to come under pressure: SK Hynix and Samsung Electronics both experienced sharp declines on Wednesday as the tech stock rally faltered. According to sources, at least some of the restrictions had been put in place before this round of selling. The sources also pointed out that Bank of America Corp, BNP Paribas, and UBS Group AG are also increasing financing costs and limiting the size of swap transactions on these two stocks. Swap transactions are a commonly used tool for hedge funds to place bets without actually owning the assets by leveraging. In markets like South Korea, hedge funds rarely have exchange trading IDs, so swap transactions through brokerages become the default way to bet on individual stocks. Sources added that the swap financing rates for SK Hynix and Samsung Electronics at banks have been raised by up to 300 basis points above the Secured Overnight Financing Rate (SOFR), reaching as high as 11%. Based on the current SOFR of 3.6%, the highest actual financing rates are close to 15%. In early May, the relevant rates were only increased by 100 to 200 basis points above SOFR. The new rates apply to new or renewed swap contracts. Since banks often find it difficult to find counterparties willing to bet on the continued rise of SK Hynix and Samsung Electronics when undertaking swap transactions, they sometimes have to use their own balance sheet, limiting their ability to take on business. Banks are concerned that if the market experiences a significant pullback, client positions will lose value, potentially leading to margin call defaults and losses for the banks. While one of the traditional advantages of swap transactions is the built-in leverage, some banks now require clients to fully fund their positions. In addition, large upcoming public offerings, including SpaceX's $75 billion IPO this week, are expected to tie up significant amounts of bank capital, further incentivizing banks to control the size of their exposure to trades on SK Hynix and Samsung Electronics. Citigroup, JPMorgan Chase, Goldman Sachs Group, Inc., and UBS Group AG all declined to comment on the matter. Bank of America Corp and BNP Paribas also did not immediately respond to requests for comment. AI frenzy boosts Korean stock allocation Over the past year, as regulators lifted short-selling bans and pushed for corporate governance reforms, the Korean market has attracted a lot of attention from hedge funds, with chip manufacturers being favored as key beneficiaries of the global AI race. The combined weight of SK Hynix and Samsung Electronics in the Korean benchmark KOSPI index has now risen to about 53%, more than double what it was when the AI frenzy swept the global market five years ago. Exchange-traded funds (ETFs) have also been driving strong demand for these chip stocks. Since its launch in early April, the actively managed Roundhill Memory ETF (DRAM.US) under Roundhill Investments has seen its assets soar to $16.7 billion. Data shows that as of Thursday, SK Hynix and Samsung Electronics combined account for over 40% of the ETF holdings. Compiled data shows that an ETF launched by CSOP Asset Management Company in Hong Kong eight months ago - aimed at achieving double the daily performance of SK Hynix - has already exceeded $10.9 billion in assets this month. The swap financing rates for the same stock may vary by bank and client, depending on the types and sizes of other assets held by the hedge fund, the closeness of the relationship with the brokerage, and the bank's own trading and matching capabilities. Affected by investor withdrawals from AI trades, the Korea KOSPI index plummeted nearly 9% intraday on Monday, triggering a 20-minute trading halt by the exchange. SK Hynix's stock has continued to decline this month, and the assets of the CSOP fund have also shrunk.