Fear of Sharp Drop in H Index... ELS Issuance Halved

In Mid-Risk, Moderate-Return National Investment,
ELS Issuance Reaches 8.6 Trillion Won This Year,
Down About 55% Compared to Q1 Last Year
H Index Continues Decline Since Last Year

[Asia Economy Reporter Ji Yeon-jin] The issuance volume of equity-linked securities (ELS) has decreased by more than half this year. The Hong Kong H-Index (HSCEI), composed of mainland Chinese companies listed on the Hong Kong stock exchange since last year, has plummeted, highlighting the possibility of principal loss in ELS linked to this index, which has led to a contraction in the ELS market.

According to the Korea Securities Depository on the 23rd, the issuance amount of ELS up to the previous day this year was 8.3223 trillion won. Although there is still time left in the period, compared to the issuance amount of about 18.8 trillion won in the first quarter of last year, this represents a 55.73% decrease, effectively halving the volume. ELS are derivative products whose returns are determined by linkage to stocks or stock indices. If the underlying asset price does not fall below the reference point during the predetermined period set by the securities company issuing the product, investors can receive the promised return upon redemption. It is a kind of probability game financial product. With continued low interest rates, ELS attracted attention as a 'medium-risk, medium-return' investment destination and issuance approached 100 trillion won in 2019.

However, since last year, continuous declines in the Chinese and Hong Kong stock markets have delayed redemptions and reduced demand. Recently, the H-Index plunged, approaching the knock-in barrier (principal loss zone), raising concerns about principal loss and causing issuance volume to drop sharply. The H-Index recorded 12,228 points on February 1 last year and continued to decline, plummeting to 6,100 points on the 15th. ELS issuance is estimated to have shrunk from 69 trillion won in 2020, a drop of about 30 trillion won, to 56 trillion won last year.

Most ELS issued domestically are step-down types with early redemption conducted every six months. If the early redemption criteria are not met, the product must be held until maturity, and if the underlying asset plunges into the knock-in zone, there is a risk of principal loss.

Securities companies issuing ELS also conduct hedging transactions to provide early redemption and returns to investors. In the back-to-back hedge, they purchase overseas ELFs with the same conditions as the ELS they issued, and in the self-hedge process, where the securities company directly trades bonds, deposits, stocks, and on- and off-exchange derivatives, a sharp drop in the underlying asset price can incur hedging costs and result in losses.

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