Kospi surges 16%, reclaims 6,500 as stricter leverage ETF rules take effect

South Korea's stock market staged a sharp rebound Friday, snapping three consecutive sessions of steep losses. The Kospi surged from the opening bell, recovering the 6,000 level and swiftly reclaiming 6,500 intraday. Markets are also watching whether tightened deposit requirements for single-stock leveraged products, which took effect the same day, will help ease volatility.

As of 10 a.m., the Kospi stood at 6,512.03, up 918.47 points, or 16.42 percent, from the previous session. The index opened at 5,657.79, a gain of 64.23 points, or 1.15 percent, before climbing sharply. Foreign investors led the rally, posting net purchases of more than 5 trillion won ($3.47 billion) on the Kospi market.

The early surge triggered buy-side sidecar halts on both the Kospi and Kosdaq markets simultaneously.

Analysts attributed the gains to a revival in investor sentiment after major semiconductor stocks rallied sharply on Wall Street overnight, combined with bargain buying following the recent sell-off.

On Wall Street, the Dow Jones Industrial Average rose 1.19 percent, the S&P 500 gained 1.66 percent and the Nasdaq advanced 2.78 percent. Semiconductor stocks led the charge — Micron jumped 18.36 percent, SanDisk surged 25.99 percent, AMD climbed 13.00 percent and Intel rose 11.30 percent. The Philadelphia Semiconductor Index gained 8.19 percent.

A share buyback by Chey Tae-won, chairman of SK hynix, also lifted sentiment. Chey disclosed that he purchased 3,620 common shares of SK hynix through open-market transactions on Thursday. The move was widely interpreted as a signal of his commitment to responsible management at a time of heightened volatility in domestic markets, particularly among semiconductor stocks.

The two semiconductor heavyweights — Samsung Electronics and SK hynix — surged roughly 24 percent and 28 percent, respectively, recovering the 250,000 won and 1.69 million won levels. Samsung Electro-Mechanics and SK Square both hit their daily upper limit.

The Kosdaq also climbed more than 9 percent to reclaim the 700 level, rising 58.21 points, or 9.05 percent, to 703.13 at the same time.

Markets are closely watching whether the higher deposit requirements for single-stock leveraged ETFs and exchange-traded notes, which took effect Friday, will help stabilize the market.

Starting Friday, investors seeking to buy or add to positions in single-stock leveraged ETFs or ETNs must hold a basic deposit of 30 million won in cash. Substitute securities — including shares, ETFs and bonds — which had previously been recognized for up to 70 percent of the deposit requirement, are no longer accepted.

Even if substitute securities are sold, the proceeds count toward the basic deposit only after settlement (T+2) is complete and the cash has actually been credited to the account. For example, if an investor uses 30 million won in cash to buy shares on a given day (T) without depositing additional cash, they will be unable to purchase single-stock leveraged products until the settlement date (T+2).

The measure advances a deposit increase that had originally been scheduled for next month, brought forward to help stabilize the market.

Analysts expect the higher deposit requirement to reduce turnover. "The key to the regulation is not so much the 30 million won cash barrier to entry, but the fact that proceeds from sales are not recognized as the basic deposit until T+2," said Lee Jae-won, a researcher at Yuanta Securities Korea. "While purchase funds are deducted immediately, the reuse of sale proceeds is restricted for two days — which will lower the turnover rate from repeated trading and switching between products."

Retail buying of single-stock leveraged products had already cooled on Thursday, the day before the new rules took effect. According to ETF CHECK, individual investors net-purchased 12 billion won worth of the KODEX SK hynix Single-Stock Leverage ETF on Thursday — a 94.9 percent plunge from net purchases of 236.9 billion won on Wednesday. Net purchases of the TIGER SK hynix Single-Stock Leverage ETF fell from 87.8 billion won to 4.9 billion won over the same period.

Financial regulators plan to swiftly roll out a second round of supplementary measures, including investment caps and higher transaction costs. The Financial Services Commission said Thursday it would "work with the relevant agencies to finalize the details as quickly as possible and implement them at the earliest opportunity."

Regulators had initially said they would assess the impact of the first round of measures — including the deposit increase and tracking-error management — before considering further steps. But with circuit breakers triggered on both the Kosdaq and Kospi for two consecutive sessions and volatility intensifying, they unveiled the additional package within two weeks.

The second round focuses on further curbing investment demand. The primary measure would cap individual exposure to single-stock leveraged products at 20 percent of total invested assets. Under the proposed rule, an investor with 10 million won in total holdings could put no more than 2 million won into single-stock leveraged products.

Transaction costs will also increase. Investors who trade single-stock leveraged products excessively will face charges including an excessive-order surcharge. The surcharge is a punitive fee designed to deter the practice of submitting large volumes of orders in futures markets with no intention of execution, then repeatedly canceling or amending them.

Regulators also plan to pursue amendments to the Capital Markets Act to allow financial authorities to act immediately in the event of acute market instability. They said they would draw on Hong Kong's Securities and Futures Commission flexible leverage framework as a reference for the revisions. The Hong Kong SFC on July 24 allowed asset managers to adjust the leverage ratios of listed leveraged and inverse products based on their own capabilities.

In addition to the existing mandatory pre-trade education requirement, a simulated trading requirement will be introduced. The measure would extend the simulated trading system currently applied to exchange-traded derivatives investors to cover single-stock leveraged products as well.