Sales volumes of knockout products in South Korea in September have fallen by 60% on the month as a direct consequence of fluctuations in global stockmarkets, but especially the dramatic drop in the Hang Seng China Enterprises Index (HSCEI), according to SRP data. The volume of new knockout products fell to KRW1.1tr (US$9.7bn) in September.

“While it was already foreseeable, after the plunge in global stockmarkets, there are limited possibilities for structured products linked to HSCEI index and issued during March to June this year to mature early in the past few months,” said Ji Hye Kim, analyst at Kyobo Securities.

SRP data shows that while the knockout volumes for HSCEI index-linked products have been at around KRW1tr per month throughout this year, they plummeted to KRW347bn in September. Furthermore, there are 5,050 knockout products worth KRW24tr that were issued between January and June that are still outstanding and ‘waiting’ to mature early: of these, products featuring the HSCEI account for 87% of the total.

“It did not come as a surprise to us,” said a senior banker at a major local securities company. “Market conditions are not only affecting investors; they are affecting us as providers in a major way. Some major securities firms that engaged in in-house hedging for HSCEI-linked structured products faced enormous losses when the HSCEI was plunging during August till September. Although the HSCEI index has slightly recovered, it is still far from making up the losses the firms made in August. If structured products linked to that index continue to delay their knockouts, it will keep on increasing the firm’s cost for hedging.”

The same burden has fallen on small securities companies that sourced back-to-back hedges from major investment banks, said the source. Local securities companies are having to increase the amount they collateralise while having to meet the increased cost of sourcing products.

The delay in knocking out has slowed down the local market since June, when volumes were at KRW5.2tr; the monthly sales volume in September has decreased to KRW2.9tr. Throughout October until the end of this year, there are a total of 3,116 live products worth KRW15tr that are linked to the HSCEI index.

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