Korea policy chief faces criminal complaint over $38.7B ETF losses

Presidential policy chief Kim Yong-beom faces a criminal complaint alleging he pressured regulators to rush single-stock leveraged ETFs, products tied to an estimated $38.7 billion in retail losses.

"Had it not been for Kim's directive, financial authorities would not have rushed to introduce leveraged ETFs tied to individual semiconductor stocks just before the election despite warnings of severe risks," Lee Jong-bae, a former Seoul city council member who filed the complaint, said.

The complaint, filed Monday with the Supreme Prosecutors' Office, accuses Kim of abuse of authority, coercion and obstruction of business. Kim said in a January interview, "If they are allowed on the Nasdaq, why shouldn't they be allowed in Korea?" Shortly after, Financial Services Commission Chairman Lee Eog-weon announced regulators would permit 2x leveraged ETFs. The products launched May 27.

The scandal has become a political liability for the Lee administration. The KOSPI has fallen from a peak of 9,000 to around 5,000, with the benchmark closing at 5,593.56 Thursday, down 1.23 percent. The opposition People Power Party has called for a parliamentary investigation and Kim's dismissal.

The Financial Supervisory Service acknowledged the rushed rollout. Governor Lee Chan-jin said at a June 22 press briefing that "it is true that we prepared the leverage ETF introduction in a rush at the time," according to Lee Jong-bae. The FSC had been internally reviewing a plan since January to establish the regulatory framework in the second quarter before launching products in the second half of the year.

Market Damage Spreads Across Chip Stocks

Samsung Electronics and SK hynix shares fell 38 percent and 50 percent respectively in July, while the KOSPI plunged 34 percent over the month. On July 29, SK hynix dropped more than 16 percent intraday, pushing its market capitalization below 1,000 trillion won. Citi estimated in a note to institutional investors that Korean retail investors lost about $38.7 billion on single-stock leveraged ETFs over the past month.

The products' mechanics magnify losses. With a 2x leveraged ETF, price movements are doubled, and negative compounding means losses can exceed the underlying stock's decline. If a stock rises 30 percent and then falls back to its original price, a regular share returns to $100, but a 2x leveraged version falls to $86.08.

Kim has pushed back against criticism, suggesting retail investors bear some responsibility. "Single-stock leveraged ETFs were not solely responsible for the volatility," he told reporters Tuesday. "It has been amplified by the structural characteristics of its market, where retail investors trade very actively."

The government has responded with emergency measures. At a Wednesday evening meeting, officials said they were considering individual investment caps that could prevent investors from allocating more than 20 percent of their portfolios to the products. Regulators also said they would seek legal authority to introduce market stabilization measures modeled on Hong Kong's variable leverage system, which could reduce leverage ratios from 2x to 1.5x or even 1x on a daily basis.

The first regulatory step took effect July 31, and trading value of the 16 single-stock leverage and inverse ETF products fell to about 3 trillion won that day — a quarter of the previous day's 12.4 trillion won. But analysts say a fundamental solution remains elusive. "Leveraged ETFs remain among the most actively traded products by turnover," said Lee Kyoung-min, an analyst at Daishin Securities.

Eric Balchunas, a senior ETF analyst at Bloomberg, noted that Korea's underlying shares were less liquid than those in larger markets, making the products more prone to magnifying swings. "The tail can wag the dog more easily," he said.

The political fallout is intensifying. People Power Party floor leader Chung Jeom-shik said the government drove the KOSPI "past a roller-coaster into a bungee-jumping domestic market" and demanded Kim's immediate dismissal. Rep. Lee Man-hee of the PPP wrote on social media, "Are the people to blame for the collapse of the stock market?"

This article is for informational purposes only and does not constitute investment advice.