Issuance of derivatives-linked securities hits record high

Issuance of derivatives-linked securities hits record high

Korea’s issuance of derivatives-linked securities has soared to a record level as more investors turn to buy stocks indirectly for decent returns amid low interest rates, data showed Thursday.

A total of 100.2 trillion won worth of derivatives-tied securities has been sold so far as of last Friday, surpassing the 100 trillion won ($83.85 billion) mark for the first time, according to data compiled by the Korea Securities Depository (KSD).

The products are structured to track the performance of underlying assets, not guarantee the principle, as investors prefer instruments that promise higher yields.

Out of them, equity-linked securities (ELS) accounted for some 70 percent with 68.3 trillion won and other derivatives-linked securities, based on such products as oil and gold, came to 31.8 trillion won, it noted.

The volume of the issuance has grown rapidly over the past several years, from 22.4 trillion won in 2010 to 51.6 trillion won in 2012, on to 84.1 trillion won in 2014 and to 98.49 trillion won last year, according to the KSD.

“Investors appear to have turned to the derivatives market in search of decent returns at this time of low interest rates while the stock market went bearish,” said Lee Joong-ho, a researcher at Yuanta Securities Korea.

“Falling oil prices are expected to attract more investors. But it is needed to heed chances of potential losses,” he noted.

In the first half of last year, the Hong Kong Stock Exchange’s Hang Seng China Enterprises index, which follows the performance of Chinese firms based in the mainland and listed on the Hong Kong bourse, hovered above 14,000 points on the back of China’s market rally, spawning many ELS products here tracking the Hong Kong index.

But the index has been on a downward spiral since the second half of last year amid concerns over China’s economic slowdown, triggering a “knock-in option” for some ELS products, meaning that investors could lose principal if underlying equities fall below a pre-determined price before maturity.

As of mid-January, 144 ELS products fell below the knock-in barrier, with combined deposits coming to around 150.9 billion, according to market researcher FnGuide.


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