The equity-linked securities fiasco is turning into a reality for South Korean banks as a load of the derivative products tied to the slacking Hong Kong's benchmark Hang Seng China Enterprises Index started maturing this month.
As of Friday, around 106.7 billion won ($81.14 million) in principal losses have been confirmed from the sales of the Hong Kong index-tied ELS products sold by the five major Korean commercial banks, according to sources from the financial ring on Sunday. The five banks are Kookmin, Hana, Shinhan, Woori and NH NongHyup.
The amount piled up in just five days since Jan. 8 when losses from ELS products underlying the Hong Kong index began to occur this year. Derivatives worth 210.5 billion won matured during the period, of which 50.7 percent evaporated into thin air due to losses.
An ELS is a type of fixed-income derivative that pays out a return based on the performance of certain equities. Investors are entitled to promised returns if the underlying asset price stays above a set level -- or knock-in level -- until maturity. Conversely, if the price falls below a predetermined level, the investors lose the principal.
The Hong Kong-tied ELS sales have turned into a national catastrophe after it was revealed the local financial firms had sold the high-risk derivatives in early 2021, when the HSCEI reached a high of around 12,000 in February before running a steep downhill. The gauge dropped to below 5,000 in October 2022 and recently hovered around 5,500.
The loss incurred by the local investors is expected to snowball dramatically over the coming year when most of the three-year maturity ELS products are set to be redeemed.
koreaherald.com |
