Increase in Derivative-Linked Securities Issuance and Redemption in H1... Outstanding Balance Decreases by 5.9 Trillion Won

Financial Supervisory Service, Yeouido, Seoul. Photo by Jinhyung Kang aymsdream@

Issuance and redemption amounts of derivative-linked securities both increased in the first half of this year compared to the same period last year.

According to the Financial Supervisory Service on the 15th, the issuance amount of derivative-linked securities was KRW 31.2 trillion, an increase of KRW 1.9 trillion compared to the same period last year, and the redemption amount was KRW 35.5 trillion, an increase of KRW 17.9 trillion. As the redemption amount exceeded the issuance amount, the outstanding balance as of the end of June was KRW 96.3 trillion, a decrease of KRW 5.9 trillion compared to the end of last year.

The Financial Supervisory Service explained, "The significant increase in redemption amount compared to the same period last year is due to the base effect of reduced early redemptions in the first half of last year amid the Russia-Ukraine war and concerns over interest rate hikes, which led to a weak stock market."

Regarding stock indices, the issuance amount of equity-linked securities (ELS) based on individual stocks was KRW 21.9 trillion, a decrease of KRW 1.7 trillion compared to the same period last year.

The issuance amount of principal-protected ELS was KRW 5.9 trillion, down 75.3% compared to the second half of last year. This is due to the base effect caused by concentrated demand from retirement pension incorporation, and it was at a similar level compared to KRW 5.5 trillion in the same period last year. Principal non-guaranteed ELS decreased due to the sluggish stock market in the second half of last year, but new issuance reached KRW 16 trillion in the first half of this year due to increased investment demand following the recovery of global indices, recovering to the KRW 18.1 trillion level of the same period last year.

By issuance type, the issuance amount of index-type ELS, which are composed only of indices as underlying assets, was KRW 16.7 trillion, accounting for the highest proportion at 76.3%, slightly increasing by 1.9 percentage points compared to the same period last year. Also, the issuance amount of ELS with three underlying assets was KRW 12.4 trillion, accounting for 56.8%, which decreased by 1.7 percentage points compared to the same period last year.

By underlying asset, the issuance scale was KRW 14.9 trillion for S&P 500, KRW 13.6 trillion for EuroStoxx 50, KRW 8.2 trillion for KOSPI 200, and KRW 4.2 trillion for Nikkei 225, in that order.

The issuance amount of ELS including Knock-In options, which are principal loss zones, was KRW 6.9 trillion, down KRW 1.1 trillion compared to the same period last year, and its proportion decreased by 2.4 percentage points to 31.4%. This is interpreted as a result of somewhat decreased investor demand for Knock-In products due to increased Knock-In occurrences in H-index linked ELS last year and recent increased volatility in global indices.

During the first half of the year, the redemption amount of ELS increased by 96.0% compared to the same period last year to KRW 25.3 trillion, influenced by a 126.5% increase in early redemption amounts as global major indices continued to rise.

As of the end of June, the outstanding balance of ELS issuance was KRW 66 trillion, a decrease of KRW 8 billion. By major underlying assets, it was KRW 36 trillion for S&P 500, KRW 32.8 trillion for EuroStoxx 50, KRW 20.5 trillion for Hong Kong H-index, and KRW 20.3 trillion for KOSPI 200.

The issuance amount of derivative-linked securities (DLS) based on underlying assets other than stocks, such as interest rates, exchange rates, and commodities, was KRW 9.3 trillion, down KRW 1.5 trillion compared to the second half of last year. Compared to the same period last year, it increased by KRW 3.6 trillion, but this was due to the base effect of a sharp decrease in issuance caused by volatility in the bond market in the first half of last year. By underlying asset, issuance amounts were KRW 7.3 trillion for interest rates, KRW 1.8 trillion for credit, and KRW 200 billion for others/commodities. The redemption amount of DLS recorded KRW 10.2 trillion, an increase of KRW 5.5 trillion compared to the same period last year, influenced by increased maturity redemptions.

As of the end of June, the outstanding balance of DLS issuance was KRW 30.3 trillion, an increase of KRW 2.3 trillion compared to the previous year, but a decrease of KRW 1.2 trillion compared to the end of last year.

Regarding the operation status of funds raised from derivative-linked securities issuance, the scale of self-hedging was KRW 56.7 trillion out of the total KRW 96.3 trillion, an increase of KRW 2.1 trillion compared to the end of last year.

In the details of managed assets, the total valuation amount of hedge assets was KRW 96.8 trillion, exceeding the liability valuation amount of KRW 91.7 trillion by KRW 5.1 trillion. Hedge assets consisted mostly of bonds at KRW 78.3 trillion (80.9%), followed by other assets at KRW 11 trillion (11.4%), deposits and cash equivalents at KRW 7.2 trillion (7.4%), and cash at KRW 2.5 trillion (2.6%).

The investment returns for ELS and DLS in the first half of the year were 6.4% and 2.9% per annum, respectively, increasing by 3.5 percentage points and 2.2 percentage points compared to the same period last year. The profit and loss from issuance and operation of derivative-linked securities by securities companies was KRW 373.3 billion, an increase of KRW 459.5 billion compared to the same period last year.

As of the end of June, derivative-linked securities with Knock-In occurrences amounted to KRW 7 trillion, accounting for 7.3% of all derivative-linked securities, all of which occurred in ELS.

The Financial Supervisory Service stated, "Recently, the Hong Kong H-index has shown increased volatility due to economic slowdown caused by the Chinese real estate sector and deepening uncertainty in the Chinese economy," adding, "There is concern that investor loss risks may expand depending on the fluctuations of the Hong Kong H-index, so we will continue monitoring the trend of the H-index and the possibility of investor losses related to Knock-In occurrences."

It also added, "Due to the increasing scale of securities companies' self-hedging of ELS and recent domestic and international financial market uncertainties, the importance of managing foreign currency liquidity against securities companies' ELS margin calls is increasing," and "We will regularly check the status of margin calls and emergency foreign currency procurement plans of securities companies and strengthen inspections of potential risk factors such as expanded margin call occurrences."

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