Hong Kong, South Korea tighten rules after leveraged ETF collapse

Hong Kong's Securities and Futures Commission has overhauled its rules for single-stock leveraged exchange-traded products, replacing fixed 2x leverage with a dynamic mechanism that allows fund managers to dial down exposure during volatile markets. The changes take effect August 3, days after an 80 percent collapse in what was once the world's largest single-stock leveraged ETF.

A HK$100 Billion Wipeout

CSOP Asset Management announced in a July 27 stock-exchange filing that 12 of its leveraged and inverse products — tracking SK Hynix ↘ 3.54%, Samsung Electronics, Nvidia ↗ 2.93%, Tesla ↗ 0.76%, and others — will adopt "flexible leverage," with daily multiples set between 1.1x and a ceiling of 2x. Fund managers must disclose the next trading day's target leverage ratio after each market close.moomoo+3

The catalyst was the implosion of the CSOP SK Hynix Daily (2x) Leveraged Product. Launched in October 2025, the fund rode the AI-fueled rally in high-bandwidth memory chips to more than HK$130 billion in assets by late June, surpassing the Tracker Fund of Hong Kong to become the city's largest exchange-traded product. But SK Hynix shares have since fallen nearly 46 percent from their peak, and the leveraged ETF's net asset value has dropped more than 80 percent, with assets shrinking from HK$132 billion to roughly HK$32 billion in just over a month.thestandard+2

South Korea Tightens in Parallel

The rout extended across the Korean market. On July 29, the Kospi fell more than 8 percent intraday for a second consecutive day, triggering another circuit breaker. Deputy Prime Minister Gu Yoon-cheol convened an emergency meeting of financial authorities and publicly apologized for regulators' failure to adequately assess risks when approving single-stock leveraged ETFs.reuters+1

South Korea will cap individual investors' exposure to such products at 20 percent of their total financial investment assets, raise trading costs, and introduce mandatory simulated-trading requirements, Reuters reported. Previously announced measures, including a minimum cash deposit of 30 million won for new investments, took effect July 31. The country had already halted new listings of single-stock leveraged ETFs and banned their advertising earlier in July.straitstimes+2

Industry Divided on New Framework

The SFC said the flexible leverage mechanism aims to limit "tracking difference" — the gap between an ETF's target daily return and its actual performance — which can widen when volatile markets force large end-of-day rebalancing trades. Single-stock leveraged and inverse products accounted for 80 percent of total assets in Hong Kong's leveraged-product market as of the end of May.finimize+1

Industry professionals remain divided. Some argue that reducing leverage during sell-offs changes the product's fundamental character, potentially slowing any recovery in net asset value for investors who bought near the top. Others, particularly risk managers, contend the mechanism is necessary to prevent a feedback loop in which large rebalancing flows amplify the underlying stock's volatility.moomoo+1

Steven Leung, executive director of institutional sales at UOB Kay Hian, told the South China Morning Post News Corp ↘ 1.67% that the sell-off had been driven by fears of rising competition from China's ChangXin Memory Technologies and growing doubts over the payback period for major AI investments.scmp