Why Did the Securities Firms Issuing German Government Bond DLS Avoid Severe Disciplinary Actions?

Bank CEOs Receive 'Reprimand Warning' in Contrast
Low Incomplete Sales Risk Due to Less Than 1% Sales Share

[Image source=Yonhap News]

[Asia Economy Reporter Ji-hwan Park] The Financial Supervisory Service (FSS) has issued a 'management caution' measure to securities companies that designed and partially sold overseas interest rate-linked derivative-linked securities (DLS). This contrasts with the severe disciplinary action of a 'reprimand warning' given to the CEOs of banks that sold the same products earlier.

According to financial authorities on the 27th, on the 24th, the FSS resolved to issue management caution measures to Hana Financial Investment, NH Investment & Securities, and IBK Investment & Securities, requiring them to improve risk management and investor protection systems related to high-risk products. The FSS imposed management caution on two investor protection measures: strengthening prior review related to internal risk consultative bodies for issuing high-risk financial products, and enhancing product review related to issuing high-risk financial products. Management caution is a recommendation and does not involve separate sanctions.

These three securities firms issued DLS worth 126.6 billion KRW linked to the 10-year German government bond yield over two months starting from March last year, and 99% of the issuance amount was sold through Woori Bank. The problem began in August last year. As the German government bond yield plummeted, it was expected that DLS investors would lose more than 90% of their principal, raising concerns not only about the banks that sold the products without properly informing about the risks but also about the securities companies that designed the products.

In this regard, on the 30th of last month, the FSS decided to issue reprimand warnings to Sohn Tae-seung, Chairman of Woori Financial Group, and Ham Young-joo, Vice Chairman of Hana Financial Group, holding them responsible for the large-scale loss incident involving overseas interest rate-linked derivative products (DLF·DLS).

On the other hand, no additional disciplinary measures were taken against the securities companies. This is because, unlike banks that sold more than 99% of the total outstanding balance in the form of private placement DLFs, securities companies accounted for less than 1% of product sales, and the possibility of incomplete sales was judged to be low.

A financial investment industry official explained, "The core issue of the DLF·DLS incident lies in incomplete sales," adding, "Although both banks and securities companies sold complex products with potential principal loss, the securities companies' sales were to professional investors with experience in derivative investments and a high understanding of financial products, whereas the banks' customers were mainly those familiar only with deposits and savings. This appears to have been considered in the level of disciplinary action."

The fact that the risk of the product was clear but no problem was found with the product itself also seems to have been reflected in the disciplinary level. A representative of a major securities company said, "The products that became problematic this time had been sold for several years, but losses occurred recently due to increased interest rate volatility," emphasizing, "If we had urged customers to focus on selling gasoline cars amid a sharp rise in oil prices, that would be wrong, but producing gasoline cars itself cannot be considered a mistake."

This content was produced with the assistance of AI translation services.