South Korean authorities convened an emergency meeting Wednesday evening, underscoring the urgent need to curb severe stock market volatility and reverse a 33% cumulative decline since July. However, market observers believe the measures announced last night were only marginal adjustments, sparking a debate over what additional tools the government can deploy.

James Fletcher, Chief Investment Officer at Ethos Investment Management, stated, "This represents a headwind for a government that actively encourages retail investors to enter the market. When officials guide household funds into equities and they suffer such significant losses within 48 hours, the political pressure to act intensifies dramatically." Here are several regulatory and market tools under consideration in market discussions:

Stock Market Stabilization Fund

The South Korean government has allocated approximately 10 trillion won (about $6.9 billion) to stabilize the stock market during periods of turbulence. Amid growing discontent from retail investors nursing substantial losses, this rarely-used tool has returned to analysts' focus. The option to deploy this fund was previously mentioned during the martial law crisis in late 2024 and the COVID-19 pandemic, but it was last actually utilized in 2008. However, Francis Tan, Chief Asia Strategist at Indosuez Wealth Management, noted that activating the fund could create moral hazard. "It's a tricky situation when retail investors call for government intervention," he said. "While the South Korean government can use the stock market stabilization fund to provide targeted liquidity and help restore confidence, this may distort market signals." The National Pension Service (NPS), one of the world's largest pension funds, typically coordinates with the government. But Choi HyunJae, Head of Korea Equity Research at Yuanta Securities, believes NPS is unlikely to actively step in under current circumstances because "its domestic stock allocation is already well above its strategic target level."

Ban on Short Selling

Jung In Yun, CEO of Fibonacci Asset Management, suggested South Korea may reconsider reimposing a short-selling ban—a controversial measure that was only lifted last year amid protests from global investors. "But I think this should be a last resort, as it could damage foreign investor confidence without addressing the fundamental concerns," he pointed out. "The priority is to prevent the market correction from turning into a liquidity crisis."

Restrictions on Leveraged ETFs

Some investors and lawmakers are urging the delisting of leveraged ETFs tied to Samsung Electronics and SK Hynix, which were launched in May. These products are designed to amplify the underlying stocks' price movements. An investor group even placed wreaths at the National Assembly gates in protest, with an opposition lawmaker expressing support for their demands. Young Jae Lee, Senior Investment Manager at Pictet Asset Management in London, stated that retail investors' purchases of leveraged ETFs have increased market volatility, prompting foreign investors to respond with large-scale selling. For retail investors, this is "a lose-lose game." South Korea's top financial regulator has expressed "regret" over the launch of such products, but delisting existing ETFs appears unlikely for now. Instead, authorities have temporarily halted new product listings, set investor position limits, and raised trading costs.

Brokerage Margin Requirements

Retail investors heavily borrowing to buy stocks—and the forced liquidations triggered by price declines—have exacerbated market volatility. Francis Tan pointed out that the government may consider raising margin requirements, citing Singapore's efforts to enhance investor education. While any stricter rules could curb the growth of margin balances, it is equally important to alleviate the mechanical selling pressure from accounts facing forced liquidations. Choi HyunJae suggested one approach could be for brokerages to relax collateral requirements or grant a brief grace period before forced liquidation. However, he added that any such relief measures would expose brokerages to greater risk and potentially reduce their margin-related revenue.

Stock Buyback Rules

The government may also adjust stock buyback rules to encourage corporate repurchases, particularly for companies that have announced buyback plans and believe their shares are undervalued. Currently, the size of repurchases at any given time is capped, and they must be spread out according to a pre-disclosed schedule.