Bank of Korea pins Kospi's sharp moves on domestic and offshore leveraged bets

The Bank of Korea has explicitly connected extreme Kospi volatility with offshore leveraged positions in Samsung and SK Hynix, pointing to a risk beyond direct Korean regulatory control because the relevant derivatives trade overseas. This differs from the domestic single-stock leveraged ETF surge that authorities have already acted on, and it raises the possibility that further monitoring or disclosure rules may be introduced, although the central bank has not yet proposed any specific steps. Given the Kospi's already high concentration in those two stocks, any new oversight on either domestic or offshore leverage will likely be watched more for its potential to reduce the index's sharp price swings this year than for any immediate market impact.

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An earlier development:

• Starting September 14, the Korea Exchange will offer real-time trading through to 8pm.

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According to the Bank of Korea, the volatile moves in the semiconductor-heavy Kospi were driven by leverage from both domestic and overseas sources.

The report's key findings included:

• In its semiannual Monetary Policy Report presented to parliament on Thursday, the Bank of Korea urged enhanced oversight of overseas derivatives tied to Korean chipmakers, cautioning that fast expansion could increase domestic volatility.
• Between January and July, the central bank found three causes for the exceptional Kospi swings: a high concentration in chip stocks, rebalancing by overseas investors, and the accumulation and reduction of domestic leverage.
• It specifically pointed to leveraged positions taken by US hedge fund Situational Awareness as a factor in the recent volatility.
• Samsung Electronics and SK Hynix together represent over half of Korea's total stock market value, leaving the index highly vulnerable to fluctuations in one sector.
• Earlier this year, the Kospi dropped approximately 40% across six weeks, erasing roughly $2.5 trillion in market capitalisation and setting a record for circuit breaker triggers.
• Domestic single-stock leveraged ETFs linked to the two chip companies also played a large role in the volatility, at times making up most of Kospi trading volume. Separately, Situational Awareness is said to have suffered a roughly 67% loss in July and was forced to sell holdings to cover loans, attracting attention from US regulators.

The Bank of Korea has called for enhanced monitoring of foreign derivatives linked to Korean chipmakers, cautioning that their fast growth could heighten domestic stock market volatility. That warning was included in the central bank's semiannual Monetary Policy Report, which it submitted to parliament on Thursday.

The report outlined three primary factors behind the Kospi's historic fluctuations from January to July: a heavy focus on semiconductor stocks, foreign portfolio adjustments, and the accumulation and later reduction of domestic leveraged positions. Interestingly, the central bank made an unusually precise mention of leveraged positions by US hedge fund Situational Awareness as a factor behind recent price moves.

The report points to a structural vulnerability. Because Samsung Electronics and SK Hynix together represent more than half of Korea's market capitalisation, moves in either stock or shifts in global sentiment about AI chip demand can affect the entire index. This concentration was clearly evident earlier this year, when the Kospi fell about 40% in six weeks, resulting in a roughly $2.5 trillion loss in market value and a record number of trading halts due to circuit breakers and sidecar mechanisms.

Domestic leveraged products were a major factor in that downturn. Single-stock leveraged ETFs linked to Samsung and SK Hynix gained enormous popularity among retail investors, at one point comprising the bulk of Kospi trading. When the market reversed, losses were so severe that Korea's finance minister publicly apologised to those affected. Since then, regulators have taken steps to tighten oversight of these instruments, including considering lower leverage caps.

The international aspect, which the latest report highlights, is less under direct Korean regulatory control. Situational Awareness, an AI-focused hedge fund that took a large leveraged position in SK Hynix, is reported to have lost about 67% in July and was forced to liquidate assets to repay loans, prompting US regulators to investigate its trading and lender communications. Since that exposure exists in overseas derivatives markets rather than in domestically supervised instruments, the Bank of Korea's push for increased monitoring underscores a visibility gap rather than a shortfall in domestic rules, and indicates that the conversation about managing concentration risk in Korea's chip-centric market will likely persist beyond this report.