South Korea’s Financial Supervisory Service (FSS) announced, on August 20, that due to the high volumes of equity-linked securities (ELSs), it will start investigating securities firms, commercial banks and insurance companies which have been distributing ELSs in the form of equity-linked trusts (ELTs) and equity-linked funds (ELFs). The regulator said it had formed a joint investigation party with bank supervision departments, financial investment supervision departments and insurance supervision departments.
Sales and issuance of structured products in South Korea have fallen in recent months with the country’s regulatory policies and the poor performance of the HSCEI and Kospi 200 to blame, according to market participants. Total sales of structured products in South Korea for July dropped by 20% from the previous month, with retail volumes falling by 9% and private banking showing a 34% decrease. The trend continued in August, with 518 products worth KRW2tr (US$1.7bn) striking compared with a total of 1,571 products with a sales volume of KRW2.5tr during the same period in the previous month.
In July, the FSS announced the prohibition of absolute return swap (ARS) linked equity-linked bonds (ELBs), which had seen exponential growth, especially within private banking. “This may have contributed to the reduced size of private banking, largely in July,” said Jungho Lee, vice-president at Yuanta Securities.
However, Lee remained positive about the market maintaining its current size or even growing further. “Increased volatility will attract more institutional investors to bet on capital-at-risk products, while the forthcoming introduction of individual savings accounts (ISA) will support the local structured products market,” he said.
The FSS's requirement for commercial banks to improve sales practices for equity-linked trusts (ELTs) is making it difficult for market players, said Chang Kyu Choi, an analyst at NH Investment & Securities. Additionally, the freefall of the Chinese equity markets is also attracting the attention of the regulators, said Choi. “It is difficult to say if the local market is still in good shape, and I foresee the continued influence of the macroeconomic environment and tightening regulation may lead to a slowdown in market activity,” he said.
The Korean structured products market usually benefits from rollover volumes, but because the HSCEI and Kospi 200 indices continue to plunge, knocked-out volume has decreased, said Choi. “This usually gets reflected the next month, with reduced monthly sales volume,” he said.
The regulatory environment is also hampering the market – with the leverage ratio regulation to be enforced in South Korea from 2016, the major local securities firms with high leverage ratio have revealed that they will be reducing equity-linked securities (ELSs) issuance and repurchase agreement sales in order to decrease leverage ratios. According to a recent semi-annual report submitted by securities houses, the average industry leverage ratio has fallen to 787%, against 816% in the first quarter.
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