Banks Slash Cost Of Leveraged Bets On SK Hynix's Korean Shares

Banks including Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. are quoting clients spreads of about 150 basis points to 300 basis points over the secured overnight financing rate (SOFR) to get exposure to SK Hynix's Korean shares via swaps, said people with knowledge of the matter, who asked not to be identified discussing private information.

In mid-June, some banks were quoting spreads of more than 1,000 basis points over SOFR to clients seeking new SK Hynix swaps or looking for renewal. SOFR has hovered between 3.50% and 3.69% since May 1.

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Bankers had rationed their limited capacity to accommodate additional SK Hynix swaps among clients, quoting exorbitant rates or turning down requests outright in some cases. The restrictions came as the AI fervor drove an 11-fold rally in SK Hynix's Korean shares in the 12 months to June 22. As sentiment became overwhelmingly bullish, banks worried about their financing costs in the repo market with portfolios that were too concentrated in such stocks.

Some banks that previously turned away clients are now seeking new business, the people said.

The changes show that worries about concentration risk at banks have eased in recent weeks. This has been helped by shifts in both supply and demand: SK Hynix's sale of American depositary receipts last month offered investors an alternative way to build bullish bets on the chipmaker, while a July rout in technology stocks reduced some leveraged bets on the shares.

Investors in Asia ex-Japan have rotated out of tech stocks and cyclical companies into more defensive sectors, according to a recent survey of the region's fund managers by Bank of America.

Representatives for Bank of America, Citigroup, Goldman Sachs and JPMorgan declined to comment. 

Such swaps give money managers the economic benefit of the stock without them having to own the underlying shares. Funds betting on stock prices in markets like South Korea, China and India typically prefer swaps over direct ownership due to capital controls, tax, anonymity and built-in leverage, among other factors.

Investors chasing AI-related returns had earlier strained banks' capacity to add new swaps on SK Hynix and, to a lesser extent, Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co. Ltd.

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But the market took a dramatic turn in July, as investor jitters about AI stocks fueled selling pressure across global markets. Korea's benchmark Kospi Index tumbled 22% last month, its biggest monthly decline since October 2008, according to Bloomberg-compiled data. SK Hynix and Samsung Electronics have a nearly 50% weight in the stock gauge between them.

A Hong Kong-listed CSOP Asset Management leveraged SK Hynix ETF product has seen its assets plunge to just under $5 billion by Tuesday, less than a third of its June 25 assets. The product was started to primarily use swaps to replicate twice the daily return of SK Hynix's Korean shares. It now allows its leverage factor to vary each day, with a two-times cap.

Leveraged single-stock ETFs have been blamed for exacerbating stock volatility with their daily rebalancing. Korean regulators have unveiled measures to curb retail trading of domestic-listed leveraged single-stock ETFs, in hopes of reducing market swings.