Six banks must repay buyers of KIKO derivatives

Finance

Published: 13 Dec. 2019, 19:57

Six banks must repay buyers of KIKO derivatives

Six banks were ordered to compensate customers for up to 41 percent of their losses from a foreign currency-linked derivative known as a knock-in, knock-out (KIKO) product sold to small- and medium-sized enterprises (SMEs).

The decision by the Financial Supervisory Service (FSS) would only cover all-option contracts sold in a negligent way. Four companies that bought the derivatives complained last year.

Shinhan Bank is required to pay the highest compensation of 15 billion won ($12.8 million), followed by Woori Bank’s 4.2 billion won, Korea Development Bank’s 2.8 billion won and KEB Hana Bank’s 1.8 billion won. A smaller regional bank, Daegu Bank, was ordered to pay 1.1 billion won and Citibank Korea 600 million won.

The regulator said the institutions failed to fully explain the risks to the customers.

“The banks told the companies to place an excessive amount into [the KIKO product] to hedge their foreign currency risks,” the FSS said in a statement.

“But they failed to fully explain the potentially huge losses if the won-dollar foreign currency rate shot up, which led them to fail to protect the interests of consumers,” it said.

Under the contracts, mostly sold between 2007 and 2008, exporters agreed to sell dollar earnings to banks at a flat rate. If the won strengthened against the dollar, the SMEs would benefit, as they’d be able to get more won for their dollar than the actual exchange rate. But if the dollar strengthened against the won, the SMEs would miss out on potential profit.

More than 800 SMEs signed up for the contracts, according to the regulator, when the dollar was weakening against the won.

When Korea was hit by the global financial meltdown in late 2008, the dollar’s value shot up against the won. That led to massive losses for subscribers, who were mostly SMEs heavily dependent on exports.

The companies accused the banks of falsely structuring the contracts and misinforming them and took the case all the way to the Supreme Court.

Still, the top court said in 2013 that the KIKO contracts were not unfair, although it acknowledged the possibility that the way they were sold could be considered negligent.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]