Bank of Korea Warns Overseas Derivatives Tied to Chipmakers

The Bank of Korea warned in its Monetary Policy Report to parliament that overseas derivatives and leveraged products tied to Samsung Electronics and SK Hynix amplified volatility in the Kospi between January and July.

The central bank identified three drivers of the unusually sharp swings: the market’s heavy concentration in semiconductor companies, portfolio adjustments by foreign investors and changes in domestic leverage. The report said those factors interacted with rapid growth in offshore instruments to magnify price moves in Korean equities.

The BOK pointed to activity by overseas hedge funds that accumulated large leveraged positions in memory-chip names and then unwound them during a steep sell-off in July. The report named a US-based fund, Situational Awareness, which was reported to have used leverage of up to four times while building and closing positions in global memory-chip stocks.

Investor demand for offshore products that track Korean chipmakers rose sharply, the central bank noted. BlackRock’s US-listed Korea ETF, which holds about a quarter of its portfolio in SK Hynix, recorded a $2.8 billion inflow in a single week in July, according to the report. Leveraged ETFs listed in Hong Kong that track Samsung Electronics and SK Hynix also grew quickly, with their combined market value increasing more than twenty-fold in the first half of the year.

The report described how hedging by global banks can feed back into the onshore market. Banks that hedge total return swaps arranged with ETF managers often trade Korean equities, futures and options. Those hedging trades can create additional liquidity flows that amplify price movements in the underlying stocks and the index.

Given these dynamics, the central bank urged closer scrutiny of overseas derivatives linked to Korean semiconductor stocks. The report called on regulators and market participants to monitor leverage levels and cross-border channels that could transmit shocks into the domestic market.

South Korea’s benchmark index is heavily weighted toward semiconductor names, with Samsung Electronics and SK Hynix among the largest components. Memory-chip companies tend to be sensitive to global demand cycles, and concentrated exposure combined with rapid changes in leveraged offshore positions can affect index-level volatility.