[Asia Economy Reporter Eunmo Koo] The issuance amount of derivative-linked securities, including equity-linked securities (ELS) and derivative-linked securities (DLS), in the first half of this year decreased by more than 30% compared to the same period last year, amid the sharp decline of major global stock markets due to the impact of the novel coronavirus disease (COVID-19).
According to the Financial Supervisory Service on the 22nd, the issuance amount of derivative-linked securities in the first half of this year was 42.1 trillion won, down 20.4 trillion won (32.6%) from 62.5 trillion won in the same period last year. The redemption amount was 40.8 trillion won, a decrease of 15.6 trillion won compared to 56.4 trillion won in the same period last year.
The issuance amount of ELS in the first half was 31.6 trillion won, down 16 trillion won (33.6%) from the same period last year. The principal-guaranteed type increased by 2.6 trillion won to 8.2 trillion won, but the principal non-guaranteed type decreased by 18.7 trillion won to 23.3 trillion won due to a reduction in early redemptions as global stock markets plunged amid COVID-19.
By issuance type, index-linked ELS amounted to 26.4 trillion won, down 16.4 trillion won (38.3%) from the same period last year, and its share of the total shrank by 6.2 percentage points to 83.7%. The proportion of stock-specific and mixed-type ELS, which include individual stocks, increased by 6.1 percentage points to 16.3% (5.1 trillion won) compared to 10.2% in the same period last year.
The redemption amount of ELS was 24.2 trillion won, down 19.4 trillion won (44.5%) from 43.6 trillion won in the same period last year. The decrease in redemption amount is also attributed to a significant reduction in early redemptions as major stock markets plunged together due to COVID-19 and other factors. As of the end of June, the outstanding balance of ELS issuance was 77.2 trillion won, an increase of 1.1 trillion won (3.0%) compared to 76.1 trillion won at the end of June last year.
The issuance amount of DLS in the first half was 10.5 trillion won, down 4.4 trillion won (29.5%) from 14.9 trillion won last year. The principal-guaranteed type (5.5 trillion won) increased by 600 billion won (12.2%) compared to 4.9 trillion won in the same period last year, but the principal non-guaranteed type (5 trillion won) shrank by 5 trillion won (50.0%) compared to 10 trillion won in the same period last year. By underlying asset, the order was interest rates (5 trillion won), credit (3.8 trillion won), stocks and others (1.1 trillion won), exchange rates (500 billion won), and commodities (100 billion won).
The redemption amount of DLS was 16.6 trillion won, an increase of 3.8 trillion won (29.7%) compared to the previous year. The outstanding balance of DLS issuance was 30.4 trillion won, down 10 trillion won (24.8%) compared to 40.4 trillion won at the end of June last year.
Among the outstanding balance of derivative-linked securities issuance of 107.6 trillion won in the first half, the amount of self-hedging was 63.9 trillion won, an increase of 4.3 trillion won (7.2%) compared to the previous year. This reflects the growing hedging operation capabilities of domestic securities firms, leading to a continuous increase in the scale and proportion of self-hedged asset management. The counterparties for back-to-back hedge transactions are mostly foreign financial companies, accounting for 32.1 trillion won or 73.5%.
As of the end of June this year, the valuation amount of assets managed with issuance funds of derivative-linked securities (hedge assets) was 111.3 trillion won, and the liability valuation was about 104.1 trillion won. Hedge assets consisted of bonds at 79.8 trillion won (71.6%), deposits and cash equivalents at 15 trillion won (13.4%), other assets at 13.6 trillion won (12.2%), cash at 3.6 trillion won (3.2%), stocks at 500 billion won (0.5%), and derivatives at -1.1 trillion won (-1.0%).
During the first half, as the underlying assets such as major stock markets plunged due to COVID-19, the proportion of loss redemptions in total redemptions increased, resulting in an annualized ELS investment return of 3.3%, down 1.6 percentage points from 4.9% in the same period last year, and an annualized DLS investment return of 0.9%, down 2.4 percentage points from 3.3% in the same period last year.
As of the end of June, derivative-linked securities that incurred principal losses upon investment (Knock-In) amounted to 1.8 trillion won, most of which (89.7%) will mature after next year.
The Financial Supervisory Service stated, “We will proactively respond to potential risks through continuous monitoring of the profits and losses from securities firms’ hedge asset transactions and their impact on the financial market,” and “We will continuously monitor risk management indicators regarding concentration on specific underlying assets related to stock-type ELS, trends in net inflows and outflows, and the scale of knock-in according to market conditions.”
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