FSS to inspect sales of controversial derivative products

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FSS to inspect sales of controversial derivative products

DLF investors to lose 95.1% of principal: FSS

By Kim Bo-eun

The Financial Supervisory Service (FSS) said Monday it will launch a comprehensive inspection this month into banks and securities firms over certain derivative products that are set to cause huge losses for investors.

They are derivatives-linked securities structured to track the performance of underlying assets such as interest rates and government-issued bond yields.

"As these products with complicated structures and possibilities of principal loss were sold by financial firms to large numbers of individual investors, we will inspect the entire process from the product design to sales, and look into the firms' internal control system," the FSS said in a statement.

According to the FSS, a total of 822.4 billion won ($677.8 million) of derivatives-linked products have been sold to 3,654 individual investors and 188 institutional investors through banks and brokerages. Banks sold 99 percent of the products.

Of the total amount, products facing the largest losses are those that have been tied to yields on 10-year treasury bonds of Germany, as bond yields sank in recent weeks. About 126.6 billion won ($104.5 million) worth of these products were sold.

"As of Aug. 7, the entire amount of the products sold have come subject to loss," the FSS said.

"If the current level of yield is maintained through maturity of the products, set from September through November, investors are estimated to suffer a 95 percent loss."

The remaining 695.8 billion won is tied to the constant maturity swaps (CMS) of U.S. and British government bonds.

CMS is an interest rate swap that allows the purchaser to fix the duration of received flows on a swap. A swap is a derivative contract through which two parties exchange cash flows from two different financial instruments.

The CMS-related products are expected to suffer a 56.2 percent loss if the constant maturity swaps keep the current level, the FSS said.

A total of 29 petitions on mis-selling of the products were submitted to the FSS as of Friday.

Woori and KEB Hana Bank sold the largest percentage of the derivative products, followed by KB Kookmin Bank, Yuanta Securities Korea, Mirae Asset Daewoo Securities and NH Investment & Securities.


DLF investors to lose 95.1% of principal: FSS

By Kim Bo-eun

The Financial Supervisory Service (FSS) said Monday it will launch a comprehensive inspection this month into banks and securities firms over certain derivative products that are set to cause huge losses for investors.

They are derivatives-linked securities structured to track the performance of underlying assets such as interest rates and government-issued bond yields.

"As these products with complicated structures and possibilities of principal loss were sold by financial firms to large numbers of individual investors, we will inspect the entire process from the product design to sales, and look into the firms' internal control system," the FSS said in a statement.

According to the FSS, a total of 822.4 billion won ($677.8 million) of derivatives-linked products have been sold to 3,654 individual investors and 188 institutional investors through banks and brokerages. Banks sold 99 percent of the products.

Of the total amount, products facing the largest losses are those that have been tied to yields on 10-year treasury bonds of Germany, as bond yields sank in recent weeks. About 126.6 billion won ($104.5 million) worth of these products were sold.

"As of Aug. 7, the entire amount of the products sold have come subject to loss," the FSS said.

"If the current level of yield is maintained through maturity of the products, set from September through November, investors are estimated to suffer a 95 percent loss."

The remaining 695.8 billion won is tied to the constant maturity swaps (CMS) of U.S. and British government bonds.

CMS is an interest rate swap that allows the purchaser to fix the duration of received flows on a swap. A swap is a derivative contract through which two parties exchange cash flows from two different financial instruments.

The CMS-related products are expected to suffer a 56.2 percent loss if the constant maturity swaps keep the current level, the FSS said.

A total of 29 petitions on mis-selling of the products were submitted to the FSS as of Friday.

Woori and KEB Hana Bank sold the largest percentage of the derivative products, followed by KB Kookmin Bank, Yuanta Securities Korea, Mirae Asset Daewoo Securities and NH Investment & Securities.


Kim Bo-eun bkim@koreatimes.co.kr


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