KOSPI Plunges 9.99% After Regulator Admits ETF Approval Error

South Korea’s benchmark KOSPI plunged 9.99% to 8,203.84, activating an automatic 20-minute trading halt on Tuesday. The fall followed an admission from the Financial Supervisory Service that regulators had moved too quickly to approve leveraged exchange-traded funds linked to Samsung Electronics and SK Hynix. Bitcoin fell below $63,000 in parallel moves across risk assets.

Governor Lee Chan-jin of the Financial Supervisory Service acknowledged the regulator had acted hastily in permitting the leveraged ETFs, which launched in late May and aim to deliver multiples of each stock’s daily performance. Lee said the products had not helped stabilise the currency and expressed regret for not blocking their introduction.

Sixteen leveraged funds tied to the two chipmakers launched with about $3 billion in combined assets and grew to more than $9 billion. Retail investors hold roughly 92% of those funds. Samsung Electronics and SK Hynix each fell more than 12%, and together the companies account for more than half of the KOSPI’s market value, amplifying their impact on the index.

The ETFs require daily rebalancing to maintain their target exposure. When the underlying stocks fall, the funds sell securities and derivatives, which can intensify downward price pressure. Before the products appeared, estimates indicated a 5% swing in Korean stocks could generate about $4.7 billion of dealer rebalancing flows, a significant portion of normal daily turnover.

Retail margin borrowing climbed to about 60 trillion won, roughly $39 billion, by the end of May. High retail leverage increases the risk that price drops will trigger margin calls and forced selling, adding to downward pressure during the rout.

Regulators are weighing possible stabilisation measures, including limits on leverage, tighter eligibility rules for such products, or restrictions on new launches, but have not provided a timeline or confirmed specific actions.

The selloff extended beyond South Korea. Weakness in US technology stocks and expectations of sustained high interest rates pushed regional benchmarks lower. Foreign investors reduced exposure to Korean equities, accelerating outflows from the chip-heavy market.

Cryptocurrency markets experienced sharp liquidations as leveraged positions unwound. Bitcoin fell as much as $1,500 during the session, touching an intraday low near $62,000 before trading around $62,300. Data from trading venues showed about $190 million of crypto positions closed in one recent hour and roughly $714 million liquidated over 24 hours. Long positions accounted for most forced closures, with Bitcoin and ether among the hardest hit.

US-listed spot Bitcoin exchange-traded funds recorded a rolling 30-day net outflow of about $6.35 billion, removing a steady source of buying support. As leveraged crypto trades were forced to close, selling pressure intensified.

Officials said they would consider targeted interventions to limit systemic risks but provided no firm timeline for regulatory changes. The episode highlighted concentrated exposure to a small number of firms, rapid ETF growth and high retail leverage as factors present during the market disruption.