[Geuman Report] Bank of Korea: "Hong Kong ELS Losses to Securities Firms Are Limited"

Bank of Korea Financial Stability Report
ELS Losses Expected but Limited Impact on Securities Firms
Increase in ELB Issuance Offsets Sharp Decline in ELS

The Bank of Korea stated on the 28th that the impact of equity-linked securities (ELS) related to the decline of the Hong Kong H-Index on securities firms is limited.

In its 'Financial Stability Status' report released that day, the Bank of Korea evaluated that the losses potentially arising from asset management or derivative transactions of ELS issuance funds have not been significant, considering that the decline rate of the Hong Kong H-Index was more gradual than in the past and that other stock indices such as the S&P 500 and Euro Stoxx 50 have shown stable trends.

The Hong Kong H-Index has been continuously declining since 2021 due to the sluggish Chinese economy. By the end of February, it had fallen 53.6% compared to the previous peak on February 17, 2021. As ELS products linked to the Hong Kong H-Index reach maturity starting this year, investor losses are expected.

[Image source=Yonhap News]

The Bank of Korea assessed that the liquidity situation of securities firms is favorable. This is because, since the implementation of measures to strengthen derivative-linked securities in July 2020, securities firms have expanded their cash assets and foreign currency liquidity. Additionally, liquidity demands for margin deposits and collateral for exchange-traded derivatives have been spread over a longer period than before.

It predicted that ELS issuance will be sluggish for the time being due to investor losses. Some securities firms that heavily rely on ELS issuance may face a decline in profitability.

However, it analyzed that the increase in issuance of equity-linked bonds (ELB), whose interest income is determined by the price movements of underlying assets, will partially offset the sharp decline in ELS issuance.

The impact on the bond market is also expected to be limited. Although the scale of bonds managed for ELS will shrink, it is not large compared to the overall market size, and the managed bonds are diversified across corporate bonds, asset-backed securities, and bank bonds.

A Bank of Korea official said, "Despite the contraction in ELS issuance based on the H-Index, the profitability and liquidity conditions of securities firms remain favorable. However, since major stock indices such as the Nikkei 225 and S&P 500 are currently at historically high levels, it is necessary to be cautious about the possibility that a sudden price adjustment in the future could increase the risk of losses for securities firms on ELS issued based on these indices."

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