FSS probes firms selling derivative products tied to Chinese stocks

Financial Supervisory Service Gov. Lee Bok-hyun makes a statement in a meeting with chiefs of financial institutions in central Seoul on Nov. 20. [YONHAP]

The financial regulators launched an investigation into financial institutions that sold derivative products tied to Chinese stocks to determine whether they properly informed investors of the risks.

The Financial Supervisory Service (FSS) is probing banks and brokerage firms that sold equity-linked securities (ELS) tied to the Hang Seng China Enterprise Index (HSCEI), according to local media reports.

ELS are a type of debt instrument with variable payments linked to an equity market benchmark. Their returns are linked to the upward and downward movements of the underlying stock and usually mature in three years.

The goal of the probe is to determine whether its investors were adequately informed of the potential losses associated with the fluctuations in the HSCEI and to assess the completeness of the sales practices.

The HSCEI serves as a benchmark that reflects the performance of mainland Chinese companies that are listed in Hong Kong.

The index has plunged to half of its 2021 peak.

The total sum of the ELS sold by the five major banks — KB Kookmin, Shinhan, Hana, Woori, NongHyup — that will mature in the first half of next year stands at around 8.4 trillion won ($6.5 billion).

KB Kookmin accounts for the largest with 4.77 trillion won, followed by NongHyup with 1.48 trillion won. Shinhan came in third with 1.38 trillion won, followed by Hana and Woori banks that sold 752.6 billion won and 24.9 billion won-worth of the products, respectively.

Without a dramatic recovery of the HSCEI index, a large amount of funds are expected to be lost especially as some of them invested in a knock-in option, which is a type of barrier option that is triggered only after the underlying asset’s price reaches a specified barrier. Investors can lose all of their principal if the underlying equities or indexes plunge sharply.

A 75-year-old who claims to be the victim said in an interview with NocutNews on Monday that he invested 900 million won into the product after selling his house. He would lose around 40 percent of the investment if the index does not recover by the time the product matures. He argued the financial institution did not mention the product he subscribed to was tied to the HSCEI.

An estimated potential loss of principal is around 40 to 50 percent if the HSCEI remains largely unchanged, according to the Korea Economic Daily, though the exact loss will change depending on the maturity and type of the product.

The FSS is conducting on-site inspections on KB Kookmin Bank and plans to probe into brokerage firms that sold heavy amounts of the products, including Mirae Asset Securities and KB Securities.

BY JIN MIN-JI [jin.minji@joongang.co.kr]