Devastating Losses
Investors in Woori Bank’s German government bond-based derivatives-linked fund (DLF) products which mature on Sept. 19 are set to suffer a devastating loss as they can collect only 40 percent of their principal. The 60 percent loss ratio is better than the earlier estimate of 95 to 100 percent. However, controversy is expected to flare up over compensation for losses as investors suffer huge losses.
According to the contractual terms and conditions of the controversial products, the final rate of return is calculated based on the interest rate of Germany’s 10-year government bonds three days before the maturity. The interest rate of Germany’s 10-year government bonds was closed at -0.511 percent on Sept. 16.
Woori Bank sold a total of 126.60 billion won (US$106.30 million) of the DLFs. Of the total, 36 billion won (US$30.23 million) worth of the products matures this month, including the 13.40 billion won (US$11.25 million) coming due on Sept. 19. When the loss ratio of 60 percent is applied, losses would amount to 21.60 billion won (US$18.14 million) this month alone. In addition, 30.30 billion won (US$25.44 million) worth of the products will mature next month and 55.90 billion won (US$46.94 million) in November. If the interest rate remains the same, losses will reach 18.18 billion won (US$15.26 million) next month and 33.54 billion won (US$28.16 million) in November.
Woori Bank’s DLFs is designed so that investors begin to suffer a loss if the interest rate of Germany’s 10-year government bonds falls below -0.2 percent. The interest rate of Germany’s government bonds has shown a steady decline and it once dropped to -0.7 percent, a level where the entire principal amount disappears. But it has recently rebounded, reducing the expected losses.
When the DLFs come due and their loss rates are determined in the future, a large number of investors are expected to file a civil complaint with the Financial Supervisory Service (FSS) for dispute mediation and controversy will grow over compensation for losses.
Currently, the FSS is conducting an investigation into the issue and found out that some products were incompletely sold. It is planning to hold a DFL dispute mediation committee as early as October and decide on the ratio of compensation for losses. Until now, 150 requests for dispute mediation have been submitted to the committee.