Financing costs for leveraged swaps on SK Hynix Inc.'s South Korean shares have halved in recent weeks, following a sharp selloff in artificial intelligence stocks and the chipmaker's U.S. listing.
Leveraged swaps are the primary tool for hedge funds to gain exposure without direct ownership, using borrowed capital. In South Korea, where few hedge funds maintain their own exchange trading IDs, swaps with brokers serve as the standard method for stock speculation.
This reversal marks a dramatic shift from earlier dynamics. Bank of America, BNP Paribas and UBS had tightened financing costs and restricted swap trade sizes on SK Hynix and Samsung shares during the AI-driven rally. The subsequent collapse in AI-linked stocks has forced those same banks to ease terms, cutting borrowing expenses sharply.
Leverage products tied to both stocks have cratered. Single-stock leverage ETFs linked to Samsung and SK Hynix have fallen to less than half their initial listing prices, prompting regulators to demand higher capital reserves. Investors must now hold more than 30 million won in cash to initiate new positions in these leverage products.
The KOSPI index's recent plunge has drawn comparisons to the severity of the 1997 foreign exchange crisis, signaling acute market stress. In response, South Korea plans to cap individual financial investment assets in leveraged ETFs at 20 percent and increase transaction costs. The government will also mandate simulation trading requirements to screen investor suitability for complex leveraged instruments.
Hong Kong is recalibrating its own leverage framework. Two-times long products are shifting to a flexible leverage model, reflecting a broader regional reassessment of leverage risk.
