South Korea structured products deliver 40% yoy growth

The South Korean structured products market hit another historical record in 2014 with 27,156 products worth KRW95tr ($88bn) issued, compared with 20,518 products worth KRW67tr ($62bn) issued in 2013. Of the total 2014 issuance, 12,827 products worth KRW47tr ($43bn) were issued in the retail space while 14,329 products worth KRW48tr ($44bn) were issued in the private banking space.

According to SRP data, the Hang Seng China Enterprises and the S&P500 were the only foreign indices to make it to the country’s 2013 top 10 underlyings by volume being featured in 343 products worth KRW1.7tr ($1.5bn) issued. However, in 2014, the combination of Eurostoxx 50 and Hang Seng China Enterprises was the third top underlying by volume with a total of 2,857 products worth KRW10tr ($9.2bn). This growth was fueled by the increased issuance of products featuring the Eurostoxx50, Hang Seng China Enterprises and S&P500 which was seen across 508 products worth KRW5.8tr ($5.3bn).

“Higher volatilities of foreign underlyings such as Eurostoxx50, Hang Seng China Enterprises and S&P500 along with their higher possibility of knock out, have prompted providers to actively issue equity-linked securities (ELSs) linked to foreign underlyings only,” Gyun Jun, analyst at Samsung Securities wrote in a report. “It is expected that higher volatilities of foreign underlyings and the lower correlation amongst them will further appeal well to the investors who are looking for more frequent early redemption with higher coupon.”

Besides the boost provided by mainstream foreign benchmarks the market also saw the arrival of new foreign indices such as the iShares China Large Cap ETF and the CSI300 index. The iShares China Large Cap ETF made its debut in the country’s private banking market via derivatives-linked securities (DLSs) gradually expanding to the retail market. This index was seen across 452 products worth KRW1.6tr ($1.4bn). The CSI300 linked also made its debut in early November in the form of a derivatives-linked bonds (DLBs) issued by IBK securities targeted at private banking clients. Yuanta Securities Korea also featured this index on a structured play aimed at retail investors bringing the total issuance linked to this index to seven products worth KRW11bn ($10m).

“It is a positive sign for the local structured products market where just a handful of underlyings over-dominate the whole market,” said JungHo Lee, vice-president at Yuanta Securities Korea. “The CSI300 can be viewed as an alternative to the Hang Seng China Enterprises as the CSI300 allows more direct access to the Chinese equity market, and local investors are poised to benefit directly from the further liberation of the Chinese financial market.”

Growth engines
The ELS and DLS market continued to be dominated by local securities firms, but the market saw further diversification with new types of products that invest directly and indirectly in ELSs including new equity linked bonds (ELBs) wrap accounts with different features.

Daishin Securities and Samsung Securities were the leading players led the issuance of wrap accounts combining three to five ELSs and ELBs.

In addition, a number of commercial banks introduce equity-linked trust (ELT) products that invest in a number of ELSs which saw a total volume of KRW21tr ($19bn), according to Korea Financial Investment Association (Kofia).

Asset managers in South Korea traditionally focused on equity-linked funds (ELFs), began launching funds using ELSs as underlyings with Samsung Asset Management and Korea Investment Trust Management leading the pack.

Rollovers from retirement pension funds also contributed to the total size of the South Korean structured products market. The sales volume of these products in November and December which are the months when most of the ELBs are re-invested into the market was KRW8.3tr ($7.6bn) and KRW7.6tr ($7bn) respectively. According to Financial Supervisory Service (FSS), the accumulated fund pool of ELB was KRW5.6tr ($5.1bn) as of September, 2014.

“The outstanding volumes of ELS and ELB are expanding fast to become closer to the total net asset of equity funds, which is currently at KRW79tr ($73bn), compared with the KRW50tr ($46bn) outstanding volume of ELS and ELB,” said Gyu Jun, analyst at Samsung Securities. “Under the current circumstances, it is also possible to see the outstanding volume of ELSs and ELBs exceeding the local equity funds for the first time”

Jungho Lee expects around KRW5tr ($4.6bn) worth of volumes will be driven by trades among local securities firms hedging their issuance risk through DLBs in the private banking space, as opposed of using swap trades. “Mostly, the securities firms will issue certificate of deposit rate 91d linked DLBs; however, it is not easy to differentiate these kinds of products that there are actually some upward bias on the actual size of the market,” said Lee.

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South Korea structured products deliver 40% yoy growth