As the trend towards low interest rates continues, the issuance of and investment in high-risk derivatives linked securities (DLS) and equity linked securities (ELS) has been growing rapidly.
The balance of DLS and ELS came to 117.40 trillion won (US$97.83 billion) as of July this year, up 90.50 trillion won (US$75.42 billion) from 26.90 trillion won (US$22.42 billion) in 2018, according to a report on financial stability submitted to the Monetary Policy Board by the Bank of Korea (BOK) on Sept. 26. The balance grew about 20 percent on average a year since 2008.
As the interest rates on savings and installment savings have decreased to the 1 percent range, an increasing number of investors put money into high-risk, high-reward products, such as DLS and ELS products.
The balance of ELS, which are linked to stock prices, stood at 76 trillion won (US$63.33 billion), accounting for 64.7 percent, while that of DLS, which are based on interest rates and credit risks as underlying assets, totaled 41.4 trillion won (US$34.50 billion), taking up 35.3 percent.
A BOK official said, “The financial market can be adversely affected if investors in high-risk DLS and ELS products try to sell them before maturity or variability of underlying assets increases. In particular, securities companies can have difficulty selling bonds which have relatively low liquidity such as corporate bonds and bonds issued by credit finance companies.”
The BOK said the size of hedging assets operated by securities firms that issue DLS and ELS products came to 126.10 trillion won (US$105.03 billion) as of July. Bonds amounted to 81.40 trillion won (US$67.82 billion), accounting for 64 percent, while savings and cash totaled 20 trillion won (US$16.66 billion), taking up 15.8 percent. However, it said there is a low chance that risks related to DLS and ELS products will worsen the asset soundness of financial institutions.
Meanwhile, Financial Services Commission (FSC) Chairman Eun Sung-soo met reporters after the opening ceremony of the 5th International Public AMC Forum (IPAF) and international conference held at Conrad Hotel Seoul in Yeouidoon Sept. 26, and said, “It will take time to come up with measures to improve the system of derivative linked fund (DLF) products linked to the interest rate, so we are planning to unveil them at the end of October.”
Previously, the Financial Supervisory Service decided to launch an investigation into banks which sold DLF and DLS products, securities companies which issued the products and asset management firms which operated funds linked to stocks until the end of this month. It is planning to announce the results of DLF investigation early next month before the National Assembly inspection.
Woori Bank and Hana Bank sold DLF and DLS products which caused a huge loss. Those who invest in the products can lose all their money according to the drop if the interest rate falls below the certain level stipulated. As the products come due at the end of this month, the loss ratio is set at up to 98.1 percent until now.