Bank of Korea flags chipmaker-linked derivatives

The Bank of Korea has urged greater scrutiny of overseas derivatives tied to South Korean semiconductor stocks, cautioning that the rapid growth of leveraged products could increase market volatility, according to a Bloomberg report. In its latest Monetary Policy Report to parliament, the central bank pinpointed several factors behind the significant fluctuations in the Kospi between January and July, including the market's heavy reliance on semiconductor companies, foreign investors' portfolio adjustments, and domestic leverage changes.

The BOK also pointed out the involvement of overseas hedge funds, which amassed substantial leveraged positions in Korean chipmakers before unwinding them during the steep July market decline. Notably, Situational Awareness, a US-based artificial intelligence-focused hedge fund, was reported to have utilized leverage up to four times while establishing and closing positions in global memory-chip companies.

The central bank's concerns arise as investor interest in offshore products offering exposure to Korean chipmakers has surged. BlackRock's US-listed Korea ETF, which holds around a quarter of its portfolio in SK Hynix, saw a $2.8bn weekly inflow in July, as reported by the BOK. The bank emphasized that the rising popularity of such products creates additional opportunities for overseas capital flows to impact Korea's domestic equity market.

Leveraged exchange-traded funds listed in Hong Kong, targeting Samsung Electronics and SK Hynix, expanded rapidly, with their combined market value increasing more than twenty times during the first half of the year, the BOK reported. The central bank also noted that global banks hedging total return swaps with ETF managers were trading Korean equities, futures, and options, potentially generating feedback effects and exacerbating price movements in the underlying market.