Last year, the domestic balance of derivative-linked securities fell to its lowest level ever. The sharp decline of the Hong Kong H index in 2023, which caused significant losses for Hong Kong equity-linked securities (ELS), led major banks to halt sales of these products. As a result, the revenue of ELS investments turned to losses last year.
The Financial Supervisory Service (FSS) announced on the 22nd that the balance of derivative-linked securities last year stood at 81.6 trillion won, a decrease of 12.7 trillion won compared to the end of the previous year, marking the lowest level since 2014 (84.1 trillion won).
Derivative-linked securities refer to securities whose revenues are determined by price fluctuations of underlying assets such as stock prices, interest rates, exchange rates, crude oil, and grains. Products based on stock prices or indices are generally referred to as equity-linked securities (ELS) and equity-linked derivative convertible bonds (ELB), while those based on bonds, commodities, and exchange rates are called derivative-linked securities (DLS) and derivative-linked bonds (DLB). The data released by the FSS this time collectively referred to ELS, ELB, DLS, and DLB as derivative-linked securities.
Last year, the issuance of derivative-linked securities decreased by 5.3 trillion won from the previous year to 73.6 trillion won, while the redemption amount decreased by 1.2 trillion won to 82.7 trillion won, surpassing the issuance amount.
The product that saw the largest decline in issuance was ELS. Last year, ELS issuance amounted to 55.2 trillion won, down 7.6 trillion won from the previous year. The significant drop in demand was attributed to the large losses incurred by ELS products due to the sharp decline of the Hong Kong H index last year.
As a result, the proportion of principal repayment products rose to 70.9%, an increase of about 20% compared to the previous year (51.2%). This indicates that the demand, which contracted due to highlighted risks, was compensated by issuing more stable principal repayment products.
The proportion of foreign index assets has decreased, while the share of the KOSPI 200 index has significantly increased. ELS based on the KOSPI 200 index rose to 78.8% last year from 49.1% in 2023.
DLS issuance last year reached 18.4 trillion won, an increase of 2.3 trillion won from the previous year. Among this, the issuance of principal repayment types amounted to 14.4 trillion won, which is an increase of 1.6 trillion won from the previous year; however, their proportion of the overall total decreased by 1.7%.
DLS redemptions amounted to 15.3 trillion won, actually decreasing and thereby significantly increasing the outstanding issuance. The outstanding DLS issuance reached 29.9 trillion won, an increase of 2.5 trillion won compared to the previous year.
Last year, the actual profits and revenues of derivative-linked securities investors decreased for both ELS and DLS compared to the previous year. In particular, ELS saw its profitability shift to losses due to confirmed losses from the H index crash and concentrated maturities. The profitability of DLS also declined from 2.8% to 1.5%.
The FSS noted that as global stock market volatility has increased, there are concerns over investment losses in ELS products, and it will strengthen monitoring of issuance trends. It said it will enhance guidance on the credit risks of derivative-linked bond issuers, whose issuance has recently increased, to raise investor awareness.
Due to the sharp decline in overseas indices, the size of margin calls for ELS has increased, prompting securities firms to initiate emergency plans to strengthen foreign currency liquidity management.