ELS Regulation
The Financial Supervisory Service (FSS) is working on new regulations on equity-linked security (ELS) products in an attempt to dispel the concerns of investors in the wake of the Tong Yang Group’s recent filing for court receivership.
Still, some experts are pointing out that the financial authorities are going too far, while disregarding the high-risk nature of ELS. In fact, the FSS has already canceled the preparation of similar regulations last year, due to the lack of efficacy. It is coming up with the same measures again at this time to shirk its responsibility. In 2012, the FSS discussed tighter regulations on ELS products while revising the Financial Investment Services and Capital Markets Act to restrict Tong Yang Securities’ sale of corporate bonds and commercial papers affiliated with the group.
“At that time, the agency mulled over various ways for investor protection such as the preferential payment rights of pension insurance,” said an industry insider, adding, “However, the regulations were not enacted because of the counterarguments that they could make the design of ELS products difficult and cause stock firms’ profitability to deteriorate.”
Trust accounts and consignment sales, in which investors’ ownership of investments is recognized, allow them to get back their investments even when the stock companies go bankrupt. ELS is not so because the investors and securities firms share the profits. What the FSS is trying to do is to protect ELS assets with an exception so as to prevent the damage from the recent Tong Yang Group scandal from spreading. The agency recently ordered a special inspection team to separate the ELS assets into an additional account and Tong Yang Securities separated the ELS-related operating assets from its own assets. The securities have been deposited into the Korea Securities Depository (KSD), and the deposits into the Korea Securities Finance Corporation.
The new regulations have resulted in split opinions in the agency itself. “When ELS assets are under the control of the KSD, investors can be protected, even if the securities firms go wrong,” said an official, claiming that repurchase is a disadvantage. Another one explained, “This is the time to repurchase Tong Yang’s ELS and it will be more advantageous even allowing for the 5% repurchase fee.”
Financial market participants are against the regulations. “ELS assets being stored in the KSD does not mean that ELS is safe,” one of them commented, adding, “If the government will be able to protect the ELS investments, it has to take care of a number of acts, ranging from the Asset-backed Securitization Act to the Trust Business Act, which is quite a tough job.”