Last Year’s Derivative-Linked Securities Issuance and Redemption Plummeted... Securities Firms Suffer 533.7 Billion KRW Loss

[Asia Economy Reporter Park Jihwan] Last year, due to the impact of COVID-19, the global stock market plummeted, causing both the issuance and redemption amounts of derivative-linked securities (ELS·DLS) to sharply decline. Securities firms also recorded a loss of 533.7 billion KRW in the issuance and management of derivative-linked securities, turning to a large-scale deficit.

According to the "2020 Status of Derivative-Linked Securities Issuance and Management by Securities Companies" announced by the Financial Supervisory Service on the 27th, the issuance amount of derivative-linked securities last year was 91.3 trillion KRW, down 37.7 trillion KRW (29.2%) from 129 trillion KRW the previous year.

The redemption amount was 107.2 trillion KRW, a decrease of 22.4 trillion KRW (17.3%) compared to 129.6 trillion KRW last year. With redemptions exceeding issuances, the outstanding issuance balance at the end of last year was 89 trillion KRW, the lowest since 84.1 trillion KRW in 2014. This is a decrease of 19.2 trillion KRW (17.7%) from 108.2 trillion KRW a year earlier.

By type, the issuance amount of equity-linked securities (ELS·ELB included) was 69 trillion KRW, down 30.9 trillion KRW (30.9%) from 99.9 trillion KRW last year.

The Financial Supervisory Service explained, "This was influenced by a sharp decline in early redemptions due to the stock price plunge in the first half of last year and a reduced incentive for reinvestment in ELS due to the subsequent global stock market boom." This was due to the rise in the base asset reference prices, a drop in coupon rates, and an increase in direct individual investments.

The proportion of public issuance slightly decreased to 83.9% compared to 85.7% the previous year. During the same period, the proportion of principal-guaranteed issuance increased from 23.2% to 38.6%.

Index-type ELS issuance amounted to 47 trillion KRW, accounting for 68.1% of the total. The issuance proportion of ELS with three or more underlying assets was 53.4%, down 20.9 percentage points from 74.3% the previous year. The issuance proportions of ELS with one or two underlying assets each increased by more than 10 percentage points.

The issuance scale by underlying asset was led by S&P 500 (36.6 trillion KRW), EuroStoxx 50 (31.1 trillion KRW), KOSPI 200 (28.1 trillion KRW), and Hong Kong H Index (19.1 trillion KRW), among others.

Last year, ELS redemptions amounted to 76.2 trillion KRW, a decrease of 23.9 trillion KRW compared to 100.1 trillion KRW in the same period last year.

At the end of last year, the outstanding balance of ELS issuance was 61.6 trillion KRW, down 9.4 trillion KRW (13.2%) from 71 trillion KRW at the end of the previous year.

DLS issuance amounted to 22.3 trillion KRW, down 6.8 trillion KRW from the previous year. In particular, principal non-guaranteed issuance sharply declined to less than half of last year's issuance amount.

This was due to the contraction of investment demand caused by the 2019 overseas interest rate-linked DLF incident and the 2020 private fund-linked DLS redemption suspension incident, as well as policies to strengthen investor protection for high-risk financial products, including the prohibition of blanket reporting for principal non-guaranteed DLS.

By underlying asset, issuance amounts were in the order of interest rates (49.1%), credit (30.0%), and exchange rates (2.5%).

DLS redemptions increased by 1.5 trillion KRW compared to the same period last year. Early redemptions amounted to 17.6 trillion KRW, exceeding maturity redemptions of 13.3 trillion KRW.

Securities firms recorded a loss of 533.7 billion KRW in the issuance and management of derivative-linked securities such as ELS and DLS, turning to a deficit. This was the first loss since 2016, when a loss of 260.8 billion KRW was recorded. It is analyzed that the cause was a 1 trillion KRW loss in hedge operations due to the sharp decline and increased uncertainty in major global stock markets in the first quarter of last year.

Last year, the investment return rate for ELS was 3.2% (annual average), down 1.1 percentage points from the same period last year. The investment return rate for DLS recorded 1.0%, down 1.3 percentage points.

As of the end of last year, the scale of ELS·DLS with principal loss occurrence zones (knock-in) was 1.5 trillion KRW, about 1.6% of the total.

The Financial Supervisory Service stated, "Considering the recent stock market adjustment trends and the possibility of global interest rate hikes, we will continue to monitor issuance and loss risks by underlying assets."

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