Global Stock Markets Recover... Securities Firms Post 370 Billion KRW Profit from Derivative-Linked Securities in Q3

Stock Market Uptrend Continues... Early Redemption Increases and Issuance Stagnates
Preference for Non-Principal Guaranteed Products Rises, High-Difficulty Product Issuance Up 45%

Securities Firms Reduce Self-Hedging Ratio Due to ELS Margin Call Issues

[Asia Economy Reporter Minji Lee] It has been revealed that securities firms made a profit of 368.5 billion KRW in the process of issuing and managing derivative-linked securities (DLS·ELS) in the third quarter of this year. This is analyzed to be due to the continued upward trend in major global stock markets, which has led to active early repayments and improved hedging trading conditions for securities companies.

According to the "2020 Third Quarter Securities Companies' Derivative-Linked Securities Issuance and Management Status" announced by the Financial Supervisory Service on the 29th, securities firms made profits while managing hedge assets such as derivatives (2.0899 trillion KRW), stocks (64.2 billion KRW), bonds (265.6 billion KRW), and others (0.8 billion KRW). Although there was a loss of 41.1 billion KRW related to deposits and internal loans, it is analyzed that securities firms made a profit for the first time this year as the trading conditions of hedge assets improved due to the upward trend in major global stock markets. Due to losses incurred throughout the first and second quarters, the total loss from issuing and managing derivative-linked securities by securities firms up to September was calculated at 679.5 billion KRW.

In the third quarter of this year, early repayments increased due to the favorable stock market, resulting in an increase in repayment amounts, but new issuances stagnated. The balance of derivative-linked securities in the third quarter was 100.9 trillion KRW, down 6.7 trillion KRW from 107.6 trillion KRW in the second quarter. During the third quarter, the issuance amount of derivative-linked securities was 16 trillion KRW, and the repayment amount was 22.1 trillion KRW.

By type, the issuance amount of equity-linked securities (including ELS·ELB) was 9.9 trillion KRW, a 7.5% (800 billion KRW) decrease compared to the previous quarter. The issuance amount of principal-guaranteed products was 1.7 trillion KRW, which decreased compared to the previous quarter, while the issuance amount of non-principal-guaranteed products increased to 8.1 trillion KRW. As the stock market improved, preference for high-risk products increased compared to principal-guaranteed ones, and the issuance amount of high-difficulty derivative-linked securities with a principal guarantee ratio below 80% was estimated at 7.7 trillion KRW, a 45% increase from the previous 5.3 trillion KRW.

By issuance form, index-type ELS, which accounts for 86% of issuance, increased by 4.9% (400 billion KRW) to 8.5 trillion KRW compared to the previous quarter. Issuance of stock-type and mixed-type ELS decreased to 1.4 trillion KRW from 2.5 trillion KRW in the previous quarter. ELS repayments reached 14.6 trillion KRW as major global stock markets hit new highs and rose significantly. Early repayments amounted to 11.3 trillion KRW, and maturity repayments were 3.2 trillion KRW. The issuance balance increased by 1.2 trillion KRW (1.7%) from the previous quarter to 72.2 trillion KRW.

DLS issuance amounted to 6.2 trillion KRW, a 19.2% (1 trillion KRW) increase compared to the previous quarter. Repayments decreased by 8.5% (700 billion KRW) to 7.5 trillion KRW. The issuance balance was 29.9 trillion KRW, down 4.9% (1.5 trillion KRW) from the second quarter.

Meanwhile, asset management companies have been reducing their own hedge ratios as risk management capabilities became prominent due to the ELS margin call issue during the global stock market crash following the spread of COVID-19. Securities firms increased their own hedge ratios from 51.2% in June last year to 59.4% as of the second quarter this year, but after experiencing the margin call issue, they lowered the previously increasing trend of their own hedge ratios. In the third quarter, the own hedge ratio relative to the issuance balance of derivative-linked securities was 57.8%, amounting to 58.4 trillion KRW.

The Financial Supervisory Service stated, "Securities firms are showing movements to strengthen their own risk management after the ELS margin call incident by lowering their own hedge ratios," and added, "Although major global stock markets are on an upward trend, uncertainties in the financial market due to COVID-19 and other factors still exist, so we plan to monitor the impact on the market."

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