South Korea's regulators have launched a "combination punch" to cool down the market! They have raised margins and urgently halted the listing of single stock leveraged ETFs.

South Korea will temporarily halt the listing of leveraged exchange-traded funds (ETFs) for individual stocks to curb market volatility. Previously, funds linked to Samsung Electronics and SK Hynix saw a surge in popularity, causing significant market fluctuations. The Financial Services Commission (FSC) of South Korea stated in a Thursday announcement that the ban will continue until the market stabilizes. The regulatory agency will also raise the minimum margin requirements for trading leveraged ETFs (i.e. the minimum balance required in a cash account) from 10 million Korean won to 30 million Korean won (about $20,300), which is expected to be implemented starting on August 5. These measures mark the most comprehensive efforts made by the South Korean government so far to calm down the frenzy of retail trading. The market frenzy has turned the $4.1 trillion stock market into one of the hottest and most volatile markets in the world. These rules were announced following a meeting of regulatory authorities, treasury department officials, and the central bank governor, as concerns grew over the excessive market fluctuations caused by leveraged ETFs linked to Samsung and SK Hynix. FSC Director Byun Je-Ho told reporters later on Thursday, "As these products saw rapid growth overseas, we initially launched them domestically, and deemed it necessary to conduct local investment to enhance the attractiveness of the South Korean capital market." "However, since then, market volatility has increased." Due to attracting a large amount of retail funds, these products and the two chipmakers they track have become very popular, accounting for over 70% of trading volume. However, foreign investors have become increasingly cautious, selling over $100 billion worth of domestic stocks just this year. On Thursday, the Kospi composite stock index fell by 6.4%, with both Samsung and SK Hynix plummeting by over 8% each. The benchmark index has fallen by over 25% since its peak in June. Meanwhile, volatility has soared, with the 30-day volatility index reaching unprecedented levels, with daily fluctuations of 5% or more becoming more common. Although stricter rules may suppress participation, some market participants believe that this balance may be worth it. Jason Minsang Kam, Head of Active Equity Management at Seoul Education & Mutual Savings Insurance Co., stated that these measures "are likely to restrict retail investors' access to leveraged ETFs to some extent," and "from the perspective of individual investors, these tightened requirements are expected to have a positive effect in mitigating short-term volatility." As part of the adjustments, regulators will also increase the mandatory training requirement for leveraged ETF investors from two hours to three hours, while raising the minimum trading unit from 1 unit to 20 units. Regulators will also tighten control over the premium or discount of market prices of ETFs from their net asset value, requiring liquidity providers to keep the gap within 2% instead of the current 3%. FSC stated that the higher margin requirements will also apply to leveraged ETFs listed overseas, aiming to prevent investors from shifting towards offshore assets. FSC added that further measures may be considered if the market cannot stabilize. Concerns about the rebound of the South Korean stock market seem to have reached the highest levels of government. President Lee Jae-myung stated on Wednesday that the stock market has become "quite unstable" after experiencing an unprecedented rebound, and urged regulatory authorities to prepare for further actions. ETF Performance Despite regulatory actions to curb speculative trading, and growing concerns among investors about overvaluation and concentration risks in the artificial intelligence (AI) frenzy, there are few signs that demand is weakening. Investors continue to pour funds into products linked to this theme, seeking new ways to profit from one of the strongest stock market rebounds in recent history. On Thursday, the top 10 most actively traded securities on the South Korean exchange by trading volume were all leveraged or inverse ETFs linked to indexes and the aforementioned chip giants. Data shows that since their debut about two months ago, prices of over a dozen leveraged ETFs tracking Samsung and SK Hynix have plummeted by around 40%. Nevertheless, investors continue to inject funds into these products. Data shows that their assets under management reached over $10 billion at the peak in June. Rebecca Sin, ETF analyst at BI, stated that these measures may help slow down the rapid growth of products but do not address the fundamental issue of investors' high appetite for AI exposure. She said, "Recent market activity indicates that despite significant volatility and losses, many investors continue to focus on the potential upside. Despite substantial retreats, investors' willingness to 'buy the dip' demonstrates a steadfast belief in these themes."