Investor Sentiment Frozen Amid Hong Kong H Index Plunge... Derivative-Linked Securities Issuance Declines for Second Consecutive Year

[Asia Economy Reporter Ji Yeon-jin] The issuance amount of derivative-linked products, which had been popular as a 'medium-risk medium-return' investment destination, recorded a decline for the second consecutive year. As of the end of last year, the outstanding balance of derivative-linked products reached its lowest level in seven years since 2014.

According to the '2021 Securities Companies Derivative-Linked Securities Issuance and Operation Status' announced by the Financial Supervisory Service on the 22nd, the issuance amount of derivative-linked securities last year was 89.2 trillion KRW, a decrease of 2.1 trillion KRW compared to the previous year. The redemption amount was 90.9 trillion KRW, which repaid the issuance amount. The outstanding issuance balance was recorded at 84.7 trillion KRW, the lowest since 2014 when it was 84.1 trillion KRW.

The issuance amount of equity-linked securities (ELS), which use stock indices as underlying assets, was 72.2 trillion KRW, an increase of 3.2 trillion KRW compared to the previous year (69.0 trillion KRW). Although it slightly increased compared to 2020 when stock prices plummeted due to the COVID-19 pandemic, the weakness of the Hong Kong H Index dampened investment demand, keeping issuance amounts at a low level. The Hong Kong H Index recorded its yearly high of 12,229 on February 17 last year, then continuously declined to 8,236 by December 31.

The issuance amount of index-type ELS was 49.5 trillion KRW (68.6%), which was a higher proportion than stock-type ELS (22.9%). The issuance proportion of ELS with three or more underlying assets increased by 3.5 percentage points to 56.9% compared to 53.4% the previous year, while the issuance proportion of ELS with a single underlying asset decreased by 3.3 percentage points.

ELS issued based on the U.S. Standard & Poor's (S&P) 500 index was the largest at 42.3 trillion KRW, followed by EuroStoxx50 (36.2 trillion KRW), KOSPI200 (27.9 trillion KRW), and Hong Kong H Index (19.1 trillion KRW). ELS incorporating S&P 500 and EuroStoxx50 accounted for high proportions of 76.0% and 65.0%, respectively, while the proportion of ELS incorporating the Hong Kong H Index slightly decreased from 35.5% to 34.3% due to the index's weakness.

The issuance scale of ELS including knock-in options, which are principal loss zones, increased by 3.8 trillion KRW to 25.7 trillion KRW compared to the previous year, and its proportion also increased by 35.6%.

ELS redemption amount was 74.1 trillion KRW, a decrease of 2.1 trillion KRW from 76.2 trillion KRW the previous year; the Financial Supervisory Service explained this was due to a decrease in early redemptions caused by the decline of the Hong Kong H Index.

The issuance amount of derivative-linked securities (DLS) using underlying assets other than stocks, such as interest rates, exchange rates, and commodities, was 17 trillion KRW last year, a decrease of 5.3 trillion KRW compared to the previous year. In 2019, investment demand shrank due to the overseas interest rate-linked DLF incident, and policies strengthening investor protection for high-risk financial products, including the blanket ban on reporting non-principal-guaranteed DLS, have led to a continuous decline in DLS issuance. Last year, DLS redemption amount was 16.7 trillion KRW, a decrease of 14.3 trillion KRW compared to the previous year, and as of the end of last year, the outstanding balance of DLS issuance was 27.2 trillion KRW, down 2 billion KRW from the previous year.

The scale of self-hedging among derivative-linked securities issuance funds was 51 trillion KRW, a decrease of 2.3 trillion KRW compared to the previous year, and the self-hedging ratio was 60.2%. The majority of back-to-back hedge counterparties were still foreign entities (75.4%), and DLS showed a higher dependence on foreign financial companies than ELS. The valuation amount of hedge assets (assets used to operate derivative-linked securities issuance funds) was 90.3 trillion KRW, exceeding the valuation balance of derivative-linked securities issuance amount of 83.4 trillion KRW. Among hedge assets, bonds accounted for the largest portion at 70.8 trillion KRW (78.4%), followed by deposits and cash equivalents (9.6 trillion KRW), and other assets (7.7 trillion KRW, 8.5%).

The profit and loss from issuance and operation of derivative-linked securities by securities companies was 858.9 billion KRW, turning to profit within a year after recording a loss of 533.7 billion KRW the previous year. The average return for investors was 3.6% for ELS and 1.6% for DLS, similar to the previous year.

Derivative-linked securities that triggered knock-in last year amounted to 13.6 billion KRW, accounting for only 0.02% of all derivative-linked securities. DLS (8.8 billion KRW) accounted for 65% of the total knock-in amount, mostly DLS incorporating crude oil-related underlying assets and the Hong Kong H Index together.

A Financial Supervisory Service official said, "Considering that most of the products triggering knock-in this year mature after 2023, the possibility of investor losses is not significant," but also added, "Given the ongoing global stock market instability due to the recent war between Russia and Ukraine and the rise in U.S. interest rates, we will continue to monitor investor losses."

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