Financial Regulator to Investigate Banks and Brokerages Over Derivatives Sales Linked to Hong Kong Exchange

SEOUL - The Financial Supervisory Service (FSS) in South Korea announced on Sunday that it will initiate an investigation into the sales of derivative products tied to Chinese stocks listed on the Hong Kong exchange. The move comes amidst growing concerns over potential substantial losses for investors involved in these products.

According to Yonhap News Agency, will target 12 local banks and brokerages. These financial institutions have reportedly sold a total of 19.3 trillion won (approximately US$14.68 billion) in equity-linked securities (ELS) products tracking Hong Kong's H index since 2021.

ELS are hybrid securities with returns linked to the performance of underlying equities, such as a stock index. The FSS highlighted that of the total outstanding ELS products, about 79.6 percent, or roughly 15.4 trillion won, are due for redemption in the first half of this year. However, they are anticipated to incur significant losses due to the underperformance of the H index.

The FSS's decision for a thorough inspection followed a preliminary review of the sales of H index-based ELS products, spurred by complaints against the two largest sellers - KB Kookmin Bank and Korea Investment and Securities Co. This preliminary review uncovered several issues, including the improper management of sales caps, failure to maintain relevant sales documents, and a tendency to promote high-risk, high-yield ELS products.

The impending investigation will address the complaints against KB Kookmin Bank and Korea Investment and Securities Co., and will simultaneously extend to all 12 institutions involved in the sale of these ELS products.

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