Surge in Early Redemption of ELS·DLS Amid Stock Market Boom... Lowest Outstanding Amount Since 2013

[Asia Economy Reporter Park Jihwan] As domestic and international stock markets continue their boom, reaching record highs, early redemption of equity-linked securities (ELS·DLS) in the first quarter of this year increased by 1.8 trillion KRW compared to the previous year. However, issuance volume during the same period decreased by 2.2 trillion KRW, resulting in the lowest outstanding issuance balance since the end of 2013.

According to the "Status of Issuance and Operation of Derivative-Linked Securities by Securities Companies in Q1 2021" released by the Financial Supervisory Service on the 15th, the outstanding balance of derivative-linked securities as of the end of Q1 this year was 82.9 trillion KRW, continuing a downward trend since 107.6 trillion KRW at the end of June last year. This is the lowest level since 63.2 trillion KRW at the end of 2013.

The issuance amount of derivative-linked securities was 24.1 trillion KRW, down 2.2 trillion KRW from 26.3 trillion KRW in Q1 last year. On the other hand, redemption amount increased by 1.8 trillion KRW to 29.3 trillion KRW. The Financial Supervisory Service analyzed that early redemption increased due to rising stock prices, including stock indices hitting record highs, and despite a recovery in new issuance, net redemption has continued for three consecutive quarters.

By type, the issuance amount of equity-linked securities (ELS) in Q1 was 18.8 trillion KRW, down 2.2 trillion KRW compared to the same period last year. Compared to Q4 last year, it decreased by 8.8 trillion KRW. The reason for the quarter-on-quarter decrease was that redemption and issuance of principal-guaranteed ELS included in retirement pensions were concentrated at the end of the year, causing a temporary surge in issuance in Q4 last year.

ELS redemption amount was 23.9 trillion KRW, down 13.5 trillion KRW from the previous quarter, influenced by the concentration of retirement pension maturity redemptions in December.

In Q1 this year, DLS issuance amounted to 5.3 trillion KRW, the same as the previous year’s corresponding period, but down 300 billion KRW compared to Q4 last year. Principal-guaranteed issuance increased by 1.2 trillion KRW over the year to 3.8 trillion KRW, while non-principal-guaranteed issuance decreased by 1.2 trillion KRW to 1.5 trillion KRW during the same period. DLS redemption amounted to 5.5 trillion KRW, down 2.9 trillion KRW.

The scale of securities companies’ own hedging of derivative-linked securities decreased. As of the end of March, it was 50 trillion KRW, down 12.1 trillion KRW compared to the same period last year, but its proportion increased by 1.7 percentage points. The Financial Supervisory Service explained, "Non-principal-guaranteed ELS, which suffered large losses last year, highlighted the loss risk of own hedging, resulting in a slight decrease in the proportion of own hedging."

As of the end of March, derivative-linked securities that experienced Knock-In (loss threshold breach) amounted to 820.8 billion KRW. Of these, 50.2% will mature within this year. Most of the Knock-In amount occurred in DLS (730.6 billion KRW), with knock-ins in products linked to crude oil and interest rates. For ELS, 93.4% of knock-ins occurred in products linked to individual stocks (mixed type and single stock type).

A Financial Supervisory Service official stated, "We will strengthen monitoring of the possibility of investor loss risks to prepare for potential delays in early redemption and occurrence of knock-ins due to stock price declines caused by future interest rate hikes."

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