Leverage regulation's first day sees trading volume rise, failing to curb volatility

South Korea's financial authorities introduced new regulations targeting single-stock leveraged Exchange Traded Funds (ETFs) aimed at reducing market volatility, particularly concerning major stocks like Samsung Electronics and SK Hynix. However, the measures showed little immediate impact on the first day of their implementation. Trading volume for these leveraged products, including inverse ETFs, actually saw a slight increase compared to the previous trading day, reaching 12.46 trillion won against 12.16 trillion won on July 16.

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New listings and advertising bans will be implemented immediately, but the main regulatory measures are scheduled to be introduced sequentially starting in August, so there are limitations in resolving practical side effects starting today.

Despite the new rules, stock prices continued to exhibit significant fluctuations. Both Samsung Electronics and SK Hynix experienced substantial drops, with their respective leveraged ETFs plummeting by as much as 9.73% and 9.35%. This heightened volatility underscores the limited effect of the regulations, which included raising the minimum deposit requirement from 10 million won to 30 million won and increasing the minimum trading unit from one share to 20 shares.

Analysts attribute the subdued impact to several factors. Han Ji-young, a researcher at Kiwoom Securities, noted that while new listings and advertising bans took effect immediately, the core regulatory measures are scheduled for phased implementation starting in August. Furthermore, she pointed out that proposed measures like reducing leverage ratios and restricting new issuances of existing products were not included in the current package, limiting its effectiveness.

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The expansion of leveraged product trading volume does not significantly affect the direction, but rather amplifies volatility.

The broader market also reflected continued instability. The Kospi 200 Volatility Index, often called the 'Korean Fear Index,' remained above 70, a level associated with high market tension. The Kospi 200 futures index dropped over 5% at one point, triggering a selling-side 'sidecar' mechanism, which temporarily halts program trading to stabilize the market. This was the 38th sidecar activation this year and the 20th for sell-offs, with more than half of these occurring during the volatile June-July period. The market also experienced four 'circuit breakers' during this time, which halt trading for a set period when the index falls by more than 8%.

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If necessary, we requested that additional measures be considered.