South Korean financial regulator has invited consumers to apply for a relief program on losses from derivatives linked to offshore interest rate movements and oblige financial institutions to remunerate up to 70 percent if they had not fully explained about the risks to the instrument.

The Financial Supervisory Service (FSS) said Tuesday it next month will start examining disputes brought by retail investors facing huge losses from their investments in the interest-backed derivatives sold and managed by commercial banks, brokerages and asset managers.

As of Friday, 29 complaints were filed on cases of losses made before the contracts ended. Alarm has been raised on escalating losses on exotic investments made on interest rate movement overseas after the debt market changed course dramatically recently as major central banks turned to easing from tightening due to signs of faster cooling in the global economy amid extended tensions from the United States and China.

A combined 822.4 billion won ($679.4 million) worth local capital was placed in derivatives following the movement of overseas interest rates as of Aug. 7 – 695.8 billion won tied to the spreads with British and U.S. treasury bonds and 126.6 billion won in German government yields, according to the FSS. Nearly 90 percent of the products have already incurred losses including the funds tied to the German 10-year government bond yield. Retail investors purchased 732.6 billion won worth, or 89.1 percent of all sold, and institutions the rest.

Funds that have invested in German bonds have lost money with the government yields falling deeper into the negative territories amid heightened concerns about global and euro-zone recession. The state employment insurance fund reportedly has incurred 47.6 billion won in losses because 81 percent of its investment was exposed to German government yields.

The FSS will investigate whether the products were sold without providing enough information, taking consideration of age, income and financial background of the investors and adequacy of products offered to them. The marketing terms and practices also will be probed.

A seller found with any major fault would have to compensate investors about 60 percent of total losses that have been incurred. An additional 10 percent could also be imposed if high-risk products are offered to those with no investment experience.

The FSS could take punitive action towards the chief executive of the institution depending on the findings.

By Choi Seung-jin and Lee Ha-yeon

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]