SK Hynix (HXSCL), a South Korea-listed company with newly issued U.S.-traded depositary receipts, has limited conversions of its Korean shares into ADRs to 2.5% of total shares outstanding, keeping a closely watched arbitrage opportunity largely out of reach. Korea Securities Depository Chief Executive Officer Rhee Yunsu said the full allowance was already used by the company's $26.5 billion ADR offering on July 10, which was described as the largest U.S. share sale ever completed by a foreign company. Investors can therefore create additional ADRs only if existing holders first cancel their U.S.-traded receipts and convert them back into Korean shares, opening space beneath the cap.

This restriction could allow SK Hynix's U.S.-traded receipts to remain at a significant premium to the Seoul-listed stock because arbitrage traders have fewer ways to narrow the price gap between the two markets. The ADRs have traded as much as 51% above the Korean shares and carried a premium of about 33% as of Wednesday, while the U.S.-listed receipts have risen roughly 16% from their offering price and climbed as much as 5% in early Thursday trading. Travis Lundy, an independent special-situations analyst who publishes on Smartkarma, suggested that traders who shorted the ADRs while buying the local shares may rush to unwind those positions, potentially lifting the premium further in the near term, although he said unusually high premiums tend not to remain elevated over time.

Citigroup, the depositary bank overseeing the ADR program, said issuance and cancellation will remain suspended until July 29 because newly issued Korean common shares cannot be transferred before they are listed on the Korea Exchange. SK Group Chairman Chey Tae-won said on July 10 that SK Hynix could issue additional ADRs if returns remain strong and the stock price stays stable, while also pledging to increase the company's U.S. investments. Investors may compare the structure with Taiwan Semiconductor Manufacturing Co. NYSE:TSM, whose ADRs can be converted into local shares but cannot be freely created from Taiwan-listed stock, a setup that has helped its U.S.-traded shares command an average 12.6% premium over the local listing during the past five years.