FSC official: Stock market must grow on earnings, not leverage

"We have confirmed that excessive leverage can amplify investor losses and market volatility. Going forward, the market must grow on the strength of corporate earnings and investor capital — not leverage."

Byeon Je-ho, director general of the Financial Services Commission's capital markets bureau, made the remarks Monday at Korea Premium Week 2026, held at Lotte Hotel in Jung-gu, Seoul.

Delivering a keynote address titled "Policy Direction for Structural Reform of the Capital Market in the Korea Premium Era," Byeon outlined four policy priorities: expanding the base of long-term, stable investment demand; strengthening responses to latent risks in the stock market; establishing shareholder-friendly corporate governance; and restructuring the Kosdaq market.

The FSC said that a concentration of investment in the semiconductor sector combined with a surge in leveraged positions during June and July drove up market volatility and triggered a sharp subsequent downturn.

"It was a painful experience, but it was also a time to learn how to respond to crisis situations that can arise in a new market environment," Byeon said, adding that the FSC would tighten oversight of leveraged investment products, margin financing and unsettled trades. He added that the commission is also considering appropriate regulatory measures for high-frequency trading, which amplifies market volatility.

The government said it plans to press ahead with capital market reform while focusing on addressing the structural vulnerabilities that have recently come to light.

The first priority is expanding the investment base of the stock market by increasing long-term, stable investment demand. The FSC plans to launch the "Our Children's Independence Fund" in the second half of next year. The fund is a scheme under which parents and the government jointly contribute for 19 years until a child reaches adulthood, with the accumulated assets managed in the capital market.

A new productive-finance ISA will also be introduced to widen the channel for long-term capital flowing into the domestic stock market. Retirement pension funds are to be pooled and managed in productive sectors of the economy.

"The Our Children's Independence Fund and the productive-finance ISA complete a lifelong long-term investment lineup that extends through retirement pensions and the national pension," Byeon said. "We plan to build a virtuous cycle in which household asset formation and a stable investment base for the capital market reinforce each other."

Reforms to promote shareholder-friendly corporate governance will also continue. The FSC plans to strengthen disclosure requirements for governance changes to help the amended Commercial Act take root in corporate practice, and will introduce a system allowing dividends to be paid at any time during the year.

For companies that chronically trade below book value, the FSC plans to introduce a "bear hug" regime — a mechanism that requires a company's board of directors to formally express its opinion on any tender offer.

"The bear hug regime, combined with directors' fiduciary duty to shareholders, will encourage boards to express their views objectively from the standpoint of all shareholders — not just the controlling shareholder," Byeon said. "The market pressure of hostile tender offers will serve as a check on corporate management."

The FSC will also move to restructure the Kosdaq market, promoting the growth of promising innovative companies while aggressively delisting penny stocks and low-market-capitalization firms. The plan calls for creating a new Kosdaq segment centered on high-quality companies to attract institutional investor capital.

"Just as the Korea discount did not emerge overnight, the Korea premium will not be achieved simply because share indexes rise temporarily," Byeon said. "It can only be realized when investors trust Korean companies, the market, and the institutions that underpin them."