The Bank of Korea (BOK) has called for closer scrutiny of overseas derivatives linked to South Korean semiconductor stocks, warning that the rapid expansion of leveraged products could intensify volatility in the country’s equity markets, according to a report by Bloomberg.
In its latest Monetary Policy Report to parliament, the central bank identified several factors behind the unusually sharp swings in the Kospi between January and July, including the market’s heavy concentration in semiconductor companies, portfolio adjustments by foreign investors and changes in domestic leverage.
The BOK also highlighted the role played by overseas hedge funds, which it said had accumulated sizeable leveraged positions in Korean chipmakers before subsequently unwinding them during the steep market sell-off in July.
Among the examples cited was Situational Awareness, the US-based artificial intelligence-focused hedge fund. The BOK said the fund was reported to have employed leverage of up to four times while establishing and then closing positions in global memory-chip companies.
The central bank’s concerns come as investor demand for offshore products providing exposure to Korean chipmakers has accelerated.
BlackRock’s US-listed Korea ETF, which has roughly a quarter of its portfolio invested in SK Hynix, recorded a weekly inflow of $2.8bn in July, according to the BOK. The central bank said the growing popularity of such products was opening additional channels through which overseas capital flows could influence Korea’s domestic equity market.
Leveraged exchange-traded funds listed in Hong Kong and tracking Samsung Electronics and SK Hynix also expanded rapidly, with their combined market value increasing more than twenty-fold during the first half of the year, the BOK said.
The central bank said activity by global banks hedging total return swaps with ETF managers involved trading Korean equities, futures and options, potentially creating additional feedback effects and amplifying price movements in the underlying market.
