Last Year’s Decline in Issuance and Redemption of Derivative-Linked Securities... Outstanding Balance Exceeds 100 Trillion Won

The Financial Supervisory Service (FSS) announced on the 26th that the issuance amount of derivative-linked securities last year was 74.2 trillion KRW, and the redemption amount was 52 trillion KRW, both decreasing compared to the previous year.

According to the '2022 Mid-Year Status of Issuance and Operation of Derivative-Linked Securities by Securities Companies' released by the FSS on the same day, the issuance amount of derivative-linked securities last year decreased by 15 trillion KRW from the previous year to 74.2 trillion KRW, and the redemption amount decreased by 38.9 trillion KRW to 52 trillion KRW, with redemptions falling short of issuances.

The outstanding balance of derivative-linked securities increased by 17.5 trillion KRW from the end of the previous year to 102.2 trillion KRW, surpassing 100 trillion KRW for the first time in three years since 2019 (108.2 trillion KRW).

Regarding stock indices, the issuance amount of equity-linked securities (ELS) based on individual stocks was 57.7 trillion KRW, down 14.5 trillion KRW (20.1%) from 72.2 trillion KRW the previous year. This was influenced by a contraction in investment demand due to the continued weakness of major overseas indices such as the S&P 500 and Hong Kong H Index amid the strengthening global tightening trend.

The issuance amount of index-type ELS was 31 trillion KRW, down 18.5 trillion KRW from the previous year, and its share also decreased by 14.9 percentage points to 53.7%. The issuance amounts of stock-type ELS and mixed-type ELS were 21.5 trillion KRW and 5.2 trillion KRW, respectively.

The proportion of ELS with a single underlying asset increased by 14.1 percentage points to 42.7%. Due to the decline in global indices, the issuance proportion of ELS with three or more underlying assets, which was the most typical type, decreased by 20.4 percentage points to 36.5%.

ELS issued based on the S&P 500 index amounted to 25.3 trillion KRW, the largest, followed by EuroStoxx50 (24.8 trillion KRW), KOSPI200 (21.7 trillion KRW), and Hong Kong H Index (5.4 trillion KRW).

The issuance scale of ELS including Knock-In options, which are principal loss zones, was 12.4 trillion KRW, down 13.3 trillion KRW from the previous year, and its share also decreased by 14.1 percentage points.

The total redemption amount of ELS was 40.2 trillion KRW, down 33.9 trillion KRW (45.7%) from the previous year. The FSS explained that this was due to an increase in cases failing to meet early redemption conditions caused by the decline of major overseas indices amid the global tightening trend in 2022.

The issuance amount of derivative-linked securities (DLS) based on underlying assets other than stocks, such as interest rates, exchange rates, and commodities, was 16.5 trillion KRW, down 0.5 trillion KRW (2.9%) from the previous year. Among these, the issuance amount of principal non-guaranteed DLS was 3.3 trillion KRW, down 2.3 trillion KRW (41.1%) from the previous year. The issuance of principal non-guaranteed DLS contracted due to increased interest rate volatility from the tightening trend and heightened caution regarding credit risk.

DLS redemption amount decreased by 4.9 trillion KRW (29.3%) to 11.8 trillion KRW due to a significant decline in early redemptions. The outstanding balance increased by 4.3 trillion KRW (15.8%) to 31.5 trillion KRW.

The scale of self-hedging in the operation of funds raised from derivative-linked securities issuance was 62.6 trillion KRW, up 11.6 trillion KRW (22.7%) from the previous year.

The self-hedging scale of ELS was 47.3 trillion KRW, an increase of 7.6 trillion KRW (19.1%), but its proportion decreased by 2 percentage points. Foreign financial institutions accounted for 76.1% with 30.1 trillion KRW as back-to-back hedge counterparties, increasing their share by 0.7 percentage points compared to the end of the previous year.

The valuation amount of hedge assets used to operate funds raised from derivative-linked securities issuance was 100.4 trillion KRW, exceeding the liability valuation amount of 94.1 trillion KRW by 6.3 trillion KRW. Bonds accounted for the largest portion of hedge assets at 79.5 trillion KRW (79.2%), followed by other assets at 15.2 trillion KRW (15.1%) and deposits at 9.8 trillion KRW (9.7%).

Last year, securities companies' profit and loss from issuing and operating derivative-linked securities was -11.6 billion KRW, a decrease of 870.5 billion KRW compared to 858.9 billion KRW the previous year, turning to a loss for the first time in two years. Derivative-linked securities with Knock-In events amounted to 7.3 trillion KRW, about 7.1% of the outstanding balance of 102.2 trillion KRW, with ELS accounting for most at 7.2 trillion KRW. Most Knock-In ELS were based on the Hong Kong H Index, and the scale of occurrences expanded as the Hong Kong H Index continued to weaken.

An FSS official stated, "We will continue to monitor the possibility of investor losses, including trends in major countries' stock markets and the surge in early redemptions," adding, "We will continuously monitor the issuance status of derivative-linked bonds by securities companies in connection with liquidity and soundness risks of securities companies and the short-term money market situation."

He continued, "With the increase in ELS self-hedging scale since last year, the importance of managing foreign currency liquidity against securities companies' ELS margin calls has increased," and added, "We will continue monitoring the issuance and self-hedging status of derivative-linked securities, regularly check the occurrence status of margin calls and foreign currency procurement contingency plans of securities companies, and proactively respond to the possibility of risk expansion."

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