Derivative-linked securities collapse following 100 trillion, with 90 trillion also falling... "China risk hampers"

[Asia Economy Reporter Lee Seon-ae] The derivative-linked securities market, which had grown annually to nearly 130 trillion won, has completely shrunk. It lost trust due to incomplete sales and redemption suspension incidents, and faced a crisis due to the prolonged stock market slump caused by the COVID-19 pandemic. Recently, investment sentiment has sharply frozen as it was caught off guard by the plunge of the Hong Kong H-Share Index (HSCEI).

According to the Korea Securities Depository on the 12th, the issuance volume of derivative-linked securities last year was 89.3 trillion won. Compared to 2020, when the issuance volume of derivative-linked securities reached 90.5 trillion won amid extreme volatility in the global financial market caused by the COVID-19 shock, the market size has further contracted. The situation is dire compared to before. In 2019, the issuance volume reached 129.2 trillion won. It had set record highs every year until 2019, with 111.6 trillion won in 2017 and 115.9 trillion won in 2018, but the market has rapidly shrunk since 2020.

In the case of last year, the financial investment industry views the loss of market trust as a bigger factor than the impact of COVID-19. ELS (Equity-Linked Securities) and ELB (Equity-Linked Bonds) increased by 5% from 68.3 trillion won in 2020 to 72.2 trillion won in 2021, whereas DLS (Derivative-Linked Securities) and DLB (Other Derivative-Linked Bonds) decreased by 23% from 22.2 trillion won to 17.1 trillion won during the same period.

The decrease in the issuance volume of derivative-linked securities in 2021 was largely due to the contraction of DLS and DLB. The reduced issuance volume in 2020 led to a contraction in the 'redemption and reinvestment' scale in 2021, and the implementation of the 'complex financial investment products' system also affected the smooth sales of ELS and ELB products by distributors.

The issuance volume of DLS and DLB has been gradually decreasing. This is because DLS issuance, which lost market trust due to the 'DLF incomplete sales incident' in 2019 and the subsequent 'DLS redemption suspension,' has gradually declined. The increased volatility of underlying assets also acted as an obstacle to attracting investors expecting stable returns from DLS and DLB. In the case of commodities, prices repeatedly surged and plunged from 2019 to 2021, and price volatility significantly increased due to the collapse of supply chains. Domestic and international interest rates fluctuated sharply amid conflicting quantitative easing and tightening by central banks worldwide. Credit risk and exchange rates also saw increased volatility as instability in domestic and international interest rates spread.

Recently, the delay in early redemption of ELS linked to the Hong Kong H-Share Index has further dampened investment sentiment since the beginning of the new year. The Hong Kong H-Share Index is composed of 50 blue-chip stocks, including Tencent and Alibaba, listed on the Hong Kong Stock Exchange, and is a common underlying asset for ELS sold domestically. The index plunged to its lowest level in 5 years and 10 months (8,015.7 points on the 5th) as the Chinese government's regulations on big tech companies and real estate dealt a direct blow.

ELS are derivatives based on the stock index of a specific country. If the stock index of the country moves within a certain range, it pays higher returns than bank deposit interest. Non-redemption occurs when the early redemption opportunity given every six months is missed, and an increase in the non-redemption balance means a higher possibility of loss. As of the end of last month, the non-redemption balance of ELS based on the Hong Kong H-Share Index was 18.3144 trillion won. Surpassing 18 trillion won is the first time in 1 year and 2 months since October 2020 (19.4382 trillion won).

Jeong In-ji, a researcher at Yuanta Securities, explained, "Although the reference price lowered as the Hong Kong H-Share Index declined in the second quarter of last year, most stocks are unlikely to succeed in early redemption because the index must exceed 9,000 points in the first quarter to surpass 95% of the index six months prior. However, since the 85% price level of the reference price mostly exists above 7,500 points, if the current price level does not fall significantly, about half of the early redemptions can be expected."

Gradually, if early redemptions occur, the derivative-linked securities market is expected to recover to the mid-90 trillion won range this year. Jeon Gyun, a researcher at Samsung Securities, said, "Currently, if the Hong Kong H-Share Index does not show further decline and rebounds, early redemptions can gradually be achieved starting with products linked to the Hong Kong H-Share Index issued in the first half of 2021. Accordingly, investment demand for derivative-linked securities with medium-risk return structures is expected to recover, increasing to 95 trillion won annually this year."

Meanwhile, as global stock markets falter, the risk of losses in ELS based on indices from countries other than Hong Kong is also increasing. The U.S. Federal Reserve (Fed) is accelerating monetary tightening, which is acting as a negative factor for the stock market. In response, financial authorities are hastening investor protection measures. The Financial Supervisory Service recently strengthened monitoring of ELS. Since the possibility of knock-in due to ELS losses is increasing, this area will be intensively managed.

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