After the crisis erupted at the "Korean version of Snowball," securities firms have been penalized.
South Korean financial regulatory authorities have pointed out in their investigation that the high-risk structured products related to the Chinese Hong Kong stock market are a result of improper sales by South Korean securities firms to retail investors. If the index remains at its current level, it is expected to incur further losses of 46 trillion Korean won (approximately 4.4 billion US dollars) this year.
On March 11, the Financial Supervisory Service (FSS) of South Korea stated that large brokerage firms in South Korea had mistakenly promoted high-risk structured products related to the Hong Kong stock market to retail investors. The FSS is considering taking remedial measures such as penalties and sales bans.
After a two-month investigation of 5 banks and 6 securities firms, the FSS found deficiencies in sales policies and consumer protection regarding the sale of complex financial products linked to the Hong Kong index. Investors had already lost 1.2 trillion South Korean won (approximately 7.1 billion Hong Kong dollars) in January and February. If the index remains at its current level, an additional loss of 4.6 trillion South Korean won (approximately 27.3 billion Hong Kong dollars, about 4.4 billion US dollars) is expected this year.
A key issue discovered by the South Korean financial regulatory agency during the investigation is that some financial companies have systemic failures in their sales systems, prioritizing their own profits over consumer interests.
Lee Se-Hoon, the head of the FSS, stated at a press conference on Monday, "The improper sales cases we announced today are not just deviations of individual companies, but are widespread among most of the banks surveyed."
The FSS mentioned that illegal activities in the sale of investment products will be sanctioned and fined according to the law. They will also consider the compensation efforts of companies for customer losses. The compensation amount will vary depending on the specific circumstances, the responsibility of each company, and the characteristics of the investors.
Retail Investors Speculate on the "Korean Version of Snowball"
The Korean version of the Snowball, officially known as Equity-linked Securities (ELS), is a type of structured financial product that combines bond instruments and derivative instruments to provide returns, usually linked to stock indices. For investors, if the underlying assets perform well, they can receive a fixed rate of return. However, if the stock performance falls below a certain point, it will result in a loss of principal.
The "Korean version of Snowball" mainly anchors to the Hong Kong stock market, with approximately 19.3 trillion South Korean won (about 144 billion US dollars) sold in South Korea, triggering a widespread knock-in range.
As these Snowball products are set to mature in the first half of this year, investors who have triggered the knock-in will face actual losses of over 50%. South Korean regulatory agencies estimate that the substantial losses from these derivatives are expected to become more apparent in the future. About 20% of the 11.5 billion US dollars' worth of ELS products will mature in the first quarter, with another 32% maturing in the second quarter.
There is no threshold for purchasing Korean "Snowballs," making retail investors the primary buyers. According to South Korean regulatory agencies, more than a quarter of the total 19.3 trillion South Korean won in such securities sold in South Korea were purchased by individuals aged 65 or older.
A structural note strategist at Korea Investment & Securities stated, "Due to the need to clear hedge positions before the expiration in March and April, selling pressure may further intensify."