Fearless Derivatives Investment... ELS Unpaid Balance at 40 Trillion Won, Issuance Up by 4 Trillion Won

[Asia Economy Reporter Lee Seon-ae] The issuance amount of derivative product equity-linked securities (ELS) is rapidly increasing. Despite growing warning signs as more products enter the knock-in (principal loss) zone due to the stock market plunge, investors seem unfazed by the 'fear of loss.' As products unable to pay early returns also surge, the amount of unpaid principal is on the rise, but investors appear to be betting firmly on the belief that the stock market is at its bottom.

According to the Korea Securities Depository on the 19th, the scale of ELS issued by domestic securities firms last month reached 4.0855 trillion KRW, a 75.61% increase compared to January. Even this month, as of the 17th, the issuance amount reached 4.3188 trillion KRW. Issuance exceeding 4 trillion KRW is the first since September 2021, when it was 4.0588 trillion KRW. The issuance amount has been steadily increasing, with 2.3264 trillion KRW in January, 3.0565 trillion KRW in February, and 3.9752 trillion KRW in March.

ELS are derivative products that offer higher returns than bank interest if the price of underlying assets such as specific stocks or stock indices does not fall below a predetermined level until the contract maturity date. Typically, the knock-in zone is entered when the underlying asset falls 40-50% from the issuance point.

The securities industry interprets the recent surge in ELS issuance as a reflection of investors' strengthened perception that the current stock market is at its bottom. A securities firm official said, "Due to the stock market plunge, the risk of loss for ELS products issued last year has increased, and unpaid balances have accumulated, so new issuance was expected to shrink. However, the current ELS investment environment is flowing into a favorable phase, leading to a recovery in the new issuance market."

The recent increase in early redemptions also influences the rise in new issuances. Early redemption in April amounted to 1.7891 trillion KRW, an 84.19% increase compared to the previous month (971.3 billion KRW). The rise in early redemption ratio in April is attributed to the fact that the issuance reference price in October, which serves as the evaluation standard, was generally lower than in September. As of the 17th of this month, early redemption amounted to 452.5 billion KRW.

However, those who invested in ELS products issued last year still face deep concerns. Many products have entered the principal loss zone. Among ELS products issued from January 1 to the 18th of last year, 42 products have entered the principal loss zone at some point. Due to global stock market volatility, many products linked to overseas stock indices such as the U.S. Standard & Poor's (S&P) 500, Europe's Euro Stoxx 50, and Hong Kong's H Index have entered the knock-in zone. Consequently, the unpaid balance has increased from 34 trillion KRW at the end of last year to 42 trillion KRW currently. As of the 17th, the unpaid balance was recorded at 42.2691 trillion KRW.

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