Banks use exotic ‘crash puts’ to shed leveraged ETF risk

Banks are turning to obscure derivatives known as "crash puts" to shed exposure accumulated from the explosive growth of leveraged exchange-traded funds, according to a report by Bloomberg. The instruments, which pay out in the event of an extreme market decline, allow dealers to transfer tail risk to counterparties willing to bet against catastrophic scenarios.bloomberg

A Booming Market Creates Hidden Exposures

Leveraged ETFs — products that promise to deliver two or three times the daily return of an individual stock — have surged in popularity globally, drawing retail investors seeking amplified gains. The funds use swaps and derivatives provided by bank trading desks, leaving those banks with concentrated exposures that can become difficult to manage during periods of stress.

According to Bloomberg, the premiums banks paid for these crash puts ranged from 14.2% to 20%. The size of the payouts reflects the scale of the risks dealers are attempting to hedge, and the willingness of specialized counterparties to absorb them.finance.yahoo+1

South Korea's Cautionary Tale

The risks are not theoretical. South Korea has become a case study in how leveraged ETFs can destabilize markets. The Kospi fell roughly 37% from late June through late July, with regulators blaming concentrated bets in single-stock leveraged products for amplifying the selloff.breakingviews

In response, South Korea's Financial Services Commission halted new listings of single-stock leveraged ETFs in mid-July and tripled the minimum cash deposit required to trade them to 30 million won. On July 29, the finance ministry announced further measures, including a cap limiting an individual's investment in such products to 20% of total investment assets.straitstimes+2

The Wall Street Journal News Corp ↘ 0.54% reported that South Korea's measures followed a 6.4% single-day plunge in the Kospi. Retail investors had pushed borrowed investment into equities to a record 60 trillion won by the end of May.reuters+1

Broader Regulatory Scrutiny

The turmoil has reinforced concerns elsewhere. In the United States, the SEC in December 2025 effectively blocked the introduction of ETFs designed to deliver three to five times daily returns, issuing warning letters to firms including Direxion, ProShares, and Tidal. A total of 73 leveraged and inverse ETFs have closed in 2026 through late July, far exceeding the 22 closures recorded in the comparable period the prior year, according to Morningstar data reported by MarketWatch.bloomberg+1

The emergence of crash puts as a risk-transfer tool underscores how deeply leveraged ETFs have embedded themselves in the plumbing of global markets — and how anxious banks have become about what happens when the music stops.