Court Recognizes KB Securities' Responsibility for 2020 Nikkei 225 Option Large-Scale Losses

Amid ongoing legal battles related to the 80 billion KRW overseas derivatives investment loss that occurred in 2020, the appellate court recognized the illegality of KB Securities' forced sale.

According to the legal community on the 26th, the 18th Civil Division of the Seoul High Court ruled against KB Securities in the damages claim lawsuit filed against Winners Asset Management regarding the forced sale of the 'Japan Nikkei 225 Index Option Investment Private Fund.' The court dismissed KB Securities' claim for unpaid funds from investors and ordered KB Securities to compensate 30% of the losses incurred by the fund investors.

Previously, Winners Asset Management invested in Nikkei 225 stock index options based on the 'Nikkei 225' index of the Osaka Securities Exchange in Japan. The Nikkei index, the underlying asset of the options, fell from 23,523 on February 17, 2020, to 21,143 on February 28 of the same month. Due to the decline in the Nikkei index, the risk level of Winners Asset Management's account increased, and KB Securities executed a forced sale of all Nikkei index put options in accordance with Article 14, Paragraph 2 of the 'Overseas Derivatives Market General Account Setting Terms and Conditions.' KB Securities bore the unpaid funds that arose during the forced sale process. KB Securities claimed the unpaid funds and delayed damages from Winners Asset Management. Winners argued that KB Securities arbitrarily finalized losses through forced sales in a situation where forced sales should not have been conducted and countered that KB Securities should compensate the investors for the losses.

The Seoul Central District Court, which handled the first trial, recognized the legitimacy of KB Securities executing the forced sale according to the terms and conditions. KB Securities' 'intraday forced sale' clause was created based on the 'Overseas Derivatives Market General Account Setting Terms and Conditions' revised by the Korea Financial Investment Association on June 25, 2014. It allowed forced liquidation without additional margin calls or contacting customers.

Investors, including Winners, appealed, and the Seoul High Court on this day recognized the illegality of KB Securities' forced sale and overturned the first trial ruling.

The law firm Class Hangyeol, representing the investors, argued that overseas exchange-traded derivatives have different profit and loss structures and risks depending on the product and should be treated differently according to the regulations of the respective exchanges. This argument appears to have influenced the reversal of the first trial ruling. Attorney Kim Kwangjoong of Class Hangyeol explained, "The margin required for Nikkei 225 option trading on the Osaka Exchange already reflects valuation losses due to option price fluctuations," adding, "Japanese securities firms reflect option valuation gains and losses only in margin calculations according to Osaka Exchange regulations." He further stated, "Forced sales are only conducted when customers fail to pay the margin."

Following the appellate court's ruling, additional lawsuits are expected. KB Securities faces liability for damages amounting to hundreds of billions of KRW. The Korea Financial Investment Association is likely to revise the Overseas Derivatives Market General Account Setting Terms and Conditions in accordance with the court ruling.

Attorney Kim said, "Domestic securities firms use the same standard terms and conditions," emphasizing, "It is significant that the court recognized the unfairness of the standard terms and conditions." He added, "It is expected that domestic securities firms will reduce forced sales based solely on valuation losses when conducting overseas derivatives brokerage in the future." Although the appellate court recognized 30% of KB Securities' responsibility, investors are expected to pursue lawsuits for the remaining 70% of the losses. The possibility of investors who did not participate in this lawsuit filing suits has also increased. The legal community predicts that considering the unpaid funds repaid by investors and the investors' losses, KB Securities may have to compensate hundreds of billions of KRW.

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