"Securities Stocks, Financial Authorities Say ELS Regulations Will Not Have Significant Impact"

[Asia Economy Reporter Minji Lee] The financial authorities' announced "Measures to Stabilize the Derivative-Linked Securities (ELS) Market" are expected to have little impact on securities stocks. On the 2nd, NH Investment & Securities predicted that while the stabilization measures for the derivative-linked securities market may not have a positive effect on the securities industry, the actual profit and loss impact might not be significant.

On the 30th of last month, the financial authorities announced the "Measures to Stabilize the Derivative-Linked Securities Market." This was in response to the negative ripple effects in the short-term funding market and foreign exchange market caused by ELS margin calls (additional collateral demands) due to the COVID-19 impact in March, which led to liquidity issues for securities firms, prompting the strengthening of related regulations.

The financial authorities plan to impose a heavy weight when reflecting debt amounts for principal non-guaranteed ELS issuance balances exceeding 50% of equity capital to strengthen leverage regulations on securities firms. Additionally, for ELS based on overseas indices, a certain level of hedge size must be held as foreign currency liquid assets to ensure risk management. The inclusion limit for asset-backed bonds issued by specialized credit finance companies will also be gradually capped to promote diversified investment in hedge assets. Among the hedge assets of derivative-linked securities, the proportion of asset-backed bonds remains in the 20% range; this is to prevent a vicious cycle where a sharp rise in short-term interest rates leads to a simultaneous increase in asset-backed bond rates. Furthermore, a platform allowing investors to have selling opportunities before maturity will be established at the Korea Exchange.

In the securities industry, this measure was evaluated as more relaxed than initially expected. Baeseung Jeon, a researcher at eBest Investment & Securities, said, "The proposed total volume regulation relative to equity capital was not included," and added, "A grace period until 2021-2022 has been set to allow securities firms to respond, so it is considered a more relaxed level compared to concerns." The introduction of ratio regulations on operating scale means flexible responses are possible depending on the asset structure of individual issuers.

Among major securities firms, Samsung Securities has the largest issuance balance relative to equity capital but is not expected to be significantly affected immediately. Junseop Jeong, a researcher at NH Investment & Securities, stated, "Samsung Securities' ELS issuance balance is around 7 trillion KRW, greatly exceeding its equity capital (4.6 trillion KRW), but it is not at a level the company cannot handle," and added, "Internally, there is a plan to gradually reduce the scale of ELS issuance in the mid to long term."

This measure is expected to accentuate polarization and product differentiation in the ELS market. Issuers with large equity capital and abundant liquid assets are relatively advantaged regarding leverage and liquidity ratios. Conversely, issuers approaching the ratio limits are likely to reduce ELS issuance. Gyun Jeon, a researcher at Samsung Securities, explained, "Around 2022, when this measure is fully applied, the ELS issuance market will see intensified polarization between large and small firms," and added, "Currently, the issuance volume of 3-year maturity, 6-month early redemption step-down ELS is large, but after this announcement, attention will focus on issuers offering principal-guaranteed products, foreign currency-denominated products, and products with diverse maturity structures."

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