The Bank of Korea drawing an explicit line between Kospi’s extreme volatility and offshore leveraged positioning in Samsung and SK Hynix highlights a risk that sits largely outside Korean regulators’ direct reach, since the derivatives in question are traded overseas. That is a meaningfully different problem from the domestic leveraged ETF boom that authorities have already moved to curb, and suggests further scrutiny or disclosure requirements could follow, though the central bank has stopped short of proposing specific measures so far. Given how concentrated Kospi already is in these two names, any tightening of oversight on either the domestic or offshore leverage side is likely to be watched closely for its potential to dampen the sharp swings that have characterised the index this year, rather than for any immediate market moving news itself.
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Earlier:
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Korea’s central bank says the wild swings in its chip heavy stock market were fuelled by leverage on both sides of the Pacific, not just at home.
Summary:
- The Bank of Korea called for stronger monitoring of overseas derivatives linked to Korean chipmakers, warning their rapid growth could amplify domestic market volatility, in its semiannual Monetary Policy Report delivered to parliament on Thursday
- The central bank identified three drivers of the unprecedented Kospi volatility seen between January and July: the market’s heavy concentration in semiconductor stocks, foreign investors’ portfolio rebalancing, and the buildup and unwinding of domestic leverage
- It specifically cited leveraged bets by US hedge fund Situational Awareness as a contributor to recent volatility
- Samsung Electronics and SK Hynix together account for more than half of Korea’s total market capitalisation, making the index unusually exposed to swings in a single sector
- Kospi plunged roughly 40% over six weeks earlier this year, wiping out an estimated $2.5 trillion in market value, with record numbers of circuit breaker triggers along the way
- Domestic single-stock leveraged ETFs tied to the two chipmakers were also a major factor in the volatility, at one point accounting for the vast majority of Kospi trading, and separately, Situational Awareness reportedly posted a roughly 67% loss in July and had to liquidate positions to repay loans, drawing scrutiny from US regulators
The Bank of Korea called for stronger monitoring of overseas derivatives tied to Korean chipmakers, warning that their rapid growth risks amplifying volatility in the country’s domestic stock market. The warning came in the central bank’s semiannual Monetary Policy Report, delivered to parliament on Thursday.
In the report, the Bank of Korea identified three main drivers behind the unprecedented swings seen in the Kospi index between January and July: the market’s heavy concentration in semiconductor stocks, portfolio rebalancing by foreign investors, and the buildup and subsequent unwinding of domestic leverage. Notably, the central bank singled out leveraged positioning by Situational Awareness, a US hedge fund, as a contributor to recent volatility, an unusually specific reference for a central bank report of this kind.
The underlying vulnerability the report describes is structural. Samsung Electronics and SK Hynix together account for more than half of Korea’s total stock market capitalisation, meaning swings in either company, or in global sentiment toward AI related chip demand more broadly, can move the entire index. That concentration was on stark display earlier this year, when Kospi plunged by roughly 40% over six weeks, wiping out an estimated $2.5 trillion in market value and triggering a record number of circuit breaker and sidecar halts.
Domestic leverage played a significant role in that episode. Single-stock leveraged exchange traded funds tied to Samsung and SK Hynix became hugely popular with retail investors, at one point accounting for the large majority of total Kospi trading volume, and the resulting losses when the market turned were severe enough that Korea’s finance minister publicly apologised to affected investors. Authorities have since moved to tighten rules around those products, including discussions on lowering their leverage multiples.
The overseas side of the equation, which the latest report focuses on, is less directly within Korean regulators’ control. Situational Awareness, an AI focused hedge fund that built a large leveraged position in SK Hynix, reportedly posted a loss of around 67% in July and was forced to liquidate holdings to repay loans, drawing scrutiny from US regulators over its trading and its communications with lenders. Because that kind of exposure sits in overseas derivatives markets rather than in instruments Korean regulators directly oversee, the Bank of Korea’s call for closer monitoring points to a gap in visibility, rather than a lack of existing domestic rules, and suggests the debate over how to manage concentration risk in Korea’s chip heavy market is likely to continue well beyond this report.
This article was written by Eamonn Sheridan at investinglive.com.