Brokerages and asset managers selling equity-linked, derivatives-linked securities in Korea will come under stricter regulations amid a string of losses from the exotic products.
The country’s top financial authority Financial Services Commission on Thursday announced new regulations to remove potential risks in the 100 trillion won ($84.1 billion) local derivatives market by toughening the guidelines on leverage ratio.
Under change, financial companies issuing more ELS and DLS products in value will have bigger leverage ratio with debt increase. In Korea, securities firms with a leverage ratio of 1,100 percent are recommended to improve the financial status from the authority, and those with 1,300 percent face remedial order.
As of the end of last year, the average leverage ratio of the country’s total 55 securities names came at 680 percent, and that of major derivatives sellers at 850 percent. To avoid remedial orders, they now have to reduce the issuance volume.
As for derivatives-linked to overseas assets and indices, sellers and managers are required to secure a certain amount – 10 to 20 percent – of foreign liquid assets, a move to prevent volatility in the forex market.
Plus, the FSC is planning to build an integrated platform to compare and analyze derivatives and risks to help consumers have a deeper understanding before investment. Another platform to allow investors to cash in on their derivatives investments and avoid an increase in losses before the fund matures will also be introduced.
With the toughened guidelines, ELS investment is expected to give smaller returns to investors. A combined 100 trillion won worth of local capital are now placed in derivatives but the amount will likely go down, experts say.
By Jin Young-tae, Kim Je-lim and Lee Ha-yeon
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