Possibility of KIKO Compensation Bank Consortium Operating This Month... Will a Voluntary Compensation Plan Be Reached?

[Asia Economy Reporter Kim Hyo-jin] A consultative body of banks selling foreign exchange derivative product KIKO is expected to start operating as early as this month to address additional dispute self-adjustment issues. However, cautious views are emerging on whether a substantial compensation plan can be derived.

According to the financial sector on the 13th, five banks?Kookmin, KEB Hana, NongHyup, SC, and HSBC?are reviewing participation in a bank consultative body to discuss KIKO voluntary compensation based on the meeting held at the Financial Supervisory Service (FSS) the day before. These banks did not go through the dispute mediation process previously conducted by the FSS.

The FSS Dispute Mediation Committee proposed a mediation plan last December recognizing the compensation liability for incomplete sales by Shinhan, Woori, Hana, Daegu, Citi, and Korea Development Bank, which sold the KIKO product, ordering compensation of 15?41% of losses to four affected companies.

Except for Woori Bank, the other five banks did not accept the mediation plan citing concerns such as breach of trust. However, Shinhan, Hana, Daegu, and Citi Banks, including Woori Bank, agreed to participate in the bank consultative body. Korea Development Bank is reportedly being separately contacted by the FSS to confirm its willingness to participate.

The FSS is pushing for additional compensation for 145 companies. The FSS’s plan is to create voluntary compensation guidelines through discussions within the bank consultative body.

At the meeting held the day before, the FSS explained the progress of the previous dispute mediation process and urged active participation from the banks. The FSS expects to confirm the willingness of the banks attending the meeting to participate in the consultative body by next week. Department heads and practical staff from each bank attended the meeting.

A bank official said, "If the process is a voluntary discussion rather than a dispute mediation procedure, there will definitely be more room to flexibly consider compensation plans."

However, the official added, "Regardless of the amount, since several banks have rejected the compensation plan after a lengthy review of legal issues, the discussion is unlikely to be easy."

KIKO is a derivative product structured so that if the exchange rate fluctuates within a certain range, foreign currency can be sold at the agreed rate, but if it goes beyond that range, large losses occur. Exporting small and medium-sized enterprises subscribed to hedge exchange rate risks but suffered losses when the exchange rate fluctuated sharply during the 2008 financial crisis.

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