South Korea’s FSC Faces Criticism for Failing to Conduct Stress Tests on Single-Stock Leveraged ETFs

According to South Korean media outlet MT, before launching single-stock leveraged ETFs, the Financial Services Commission (FSC) of Korea conducted an internal review of the product’s structural risks but did not perform stress tests on specific products or simulate potential market impacts arising from sharp declines in major stocks such as Samsung Electronics and SK Hynix. Internal review documents from the FSC indicate that single-stock leveraged ETFs exhibit higher volatility compared to leveraged products tracking market indices, posing risks of “volatility decay” leading to long-term losses, and potentially amplifying price fluctuations in the underlying stocks during rebalancing. However, the related analysis primarily addressed general structural risks of leveraged ETFs and did not assess the potential impact on the ETF products themselves or market liquidity in the event of extreme price drops in individual stocks like Samsung Electronics or SK Hynix. This controversy has reignited market concern over risk management of highly leveraged ETFs in Korea. As single-stock leveraged products continue to expand, whether regulators should implement stricter stress-testing mechanisms has become a focal point of market discussion.