South Korea FSC launched single-stock leveraged ETFs without stress test

South Korea’s Financial Services Commission said single-stock leveraged ETFs carry greater volatility and loss risk than conventional leveraged ETFs, but documents submitted to lawmakers show the regulator did not conduct a stress test before the products were introduced. Materials sent on Aug. 3 to the office of Rep. Park Seong-hoon of the People Power Party indicated the FSC carried out neither an internal review using stress scenarios nor an external test through another institution. That clashes with remarks by FSC Chairman Lee Bok-hyun at a July 29 meeting of the National Assembly’s Political Affairs Committee, where he said the products had undergone a full review and said he would provide related documents. The records included a 2024 Korea Capital Market Institute report, rebalancing-volume data by leverage ratio, and market capitalization and trading value statistics as of March for stocks including Samsung Electronics and SK Hynix, but no shock analysis based on scenarios such as a sharp drop in those shares. Political criticism has since deepened. Cho Kuk, head of the Innovation Policy Institute of the Rebuilding Korea Party, called the introduction of the products a "clear policy failure" and a failure of state-led finance, saying 62% of forced-liquidation accounts belonged to investors aged 35 or younger. He said young investors who trusted government policy suffered heavy losses and urged a full inspection of the rollout, delayed response and follow-up measures, while naming Kim Yong-beom, Yoon Chang-ryeol, Lee Eok-won and Lee Chan-jin as officials who should be held accountable. The controversy has widened as financial authorities prepare amendments to the Capital Markets Act that would let them temporarily cut the current 2x leverage ratio on single-stock leveraged ETFs to 1.5x or 1x during extreme market swings without separate product modification procedures. Authorities are also considering limiting individual investment in leveraged ETFs to 20% of account assets and requiring a period of simulated trading. Trading activity fell sharply after the minimum deposit requirement was raised from ₩10 million to ₩30 million on July 31, with the 16 single-stock leveraged ETFs accounting for 6.4% of total KOSPI trading volume, about one-fifth of July’s 33.8% average, according to Koscom CHECK analysis. Political criticism intensified after a recent two-day 16.17% drop in the KOSPI and a 17.91% rebound in a single day, while authorities have identified single-stock leveraged ETFs as a main source of volatility.