As the Hang Seng China Enterprises Index (HSCEI) in Hong Kong experiences a sharp decline, a substantial loss in equity-linked securities (ELS) linked to this index is anticipated, with outstanding sales of related products reaching a staggering 20 trillion won. Concerns are mounting over potential damages to individual investors as 15 trillion won worth of these products are set to mature this year.
The financial authorities plan to conduct on-site inspections starting with the largest distributor after identifying issues within the sales management system during a preliminary investigation into Hong Kong ELS products.
According to the Financial Supervisory Service (FSS) on Jan. 7, the total outstanding sales of domestically distributed ELS products linked to the HSCEI amounted to 19.3 trillion won (US$14.7 billion). Among these, banks accounted for 15.9 trillion won while securities firms sold products worth 3.4 trillion won.
Breaking down the sales by investor type, the volume sold to individual investors amounted to 17.7 trillion won, while for corporate investors the figure stood at 1.6 trillion won.
It was revealed that investors aged 65 and above accounted for 21.6 percent, investing a total of 5.4 trillion won. The proportion of first-time investors without previous experience in derivative-linked securities was calculated at around 8.6 percent.
The issue lies in the intensifying losses amid the sharp decline of the HSCEI, with the added challenge that ELS products worth 15.4 trillion won are maturing this year alone. This constitutes a substantial 79.6 percent of the total outstanding balance. By quarter, a concentration of maturities occurs in the first half, with 3.9 trillion won, or 20.4 percent, due in the first quarter and 6.3 trillion won, making up 32.3 percent, in the second quarter. This totals 10.2 trillion won, representing 52.7 percent for the first half.
The Hong Kong’s HSCEI stood at 12,229 points in February 2021 but experienced a significant decline, dropping by 59.6 percent to 4,939 points in October 2022. It concluded at 5,769 points at the end of last year, indicating a sluggish recovery.
In response to this, the FSS plans to conduct on-site inspections starting on Jan. 8 with KB Kookmin Bank and Korea Investment & Securities, sequentially examining major distributors, including relevant banks and securities firms. The decision to conduct these inspections follows a thorough investigation, including on-site and written inquiries that specifically targeted major distributors in November and December of last year. The FSS explains that this investigation revealed overarching issues in their management systems.