Following a sharp decline in the South Korean stock market this month, regulators have begun discussing stronger market stabilization measures. Media reports indicate that the Korea Exchange is assessing the feasibility of suspending trading in leveraged ETFs for individual stocks and exploring the possibility of temporarily banning short selling and narrowing price fluctuation limits.
Regulatory scrutiny intensifies after stock market crash
South Korea's KOSPI stock index plunged for the second consecutive trading day, briefly falling below 6,000 points. Although there were signs of stabilization during Thursday's trading session, it still fell by about 1%. Since July, foreign investors have net sold 18.5 trillion won worth of South Korean stocks, equivalent to approximately $13 billion, and market trading activity has clearly cooled.
Following Wednesday's sharp market decline, the Governor of the Bank of Korea and heads of financial regulators held an emergency meeting that evening. Finance Minister Koo Yoon-cheol apologized to the National Assembly that day for the earlier introduction of leveraged single-stock products, stating that the arrangement had not been adequately considered.
Exchange evaluates short-selling ban scheme
According to media reports, the Korea Exchange has begun examining the feasibility of temporarily banning short selling and narrowing price fluctuation limits, and is conducting internal discussions regarding the time required for system implementation. Yonhap News Agency's Infomax, citing sources, stated that currently only technical feasibility has been confirmed, but these discussions do not imply a decision to implement the measures.
Following a meeting on Wednesday, South Korean regulators announced measures to limit the size of individual investors' holdings in leveraged funds focused on a single stock and to increase transaction costs for related ETFs. Regulators believe these products amplified volatility in heavyweight stocks during the previous rally and subsequent forced liquidations.
Markets question the strength of existing measures.
However, market participants generally believe that simply limiting the size of individual holdings may not be enough to significantly reduce the impact of such products on the market. Compared to Hong Kong's approach this month, South Korea has not yet directly lowered the leverage ratio of ETFs.
Some institutions believe that if the leverage of the products themselves is not addressed, investors who already hold the relevant ETFs may continue to experience significant price volatility, and similar products listed in New York and Hong Kong are not affected by the new South Korean regulations. Kim Jin-wook, an economist at Citibank Korea, stated that existing measures help mitigate volatility, but the effect could be more pronounced if tools such as market stabilization funds are introduced.
