FSS Begins Inspection of SK Securities' Wrap and Trust Management

SK Securities Refuses Redemption Requests for Trust Products
Investors Prepare Civil Lawsuits... Settled with Compensation Offer
Compensating Investment Losses Violates Capital Markets Act

SK Securities, suspected of compensating losses after selling maturity-mismatched trust products with potential principal loss, is under inspection by financial authorities. Compensating investment losses violates the Capital Markets Act. SK Securities was previously warned by the Financial Supervisory Service (FSS) in 2002 for reviewing derivative product loss compensation.

According to financial authorities on the 20th, the FSS is inspecting SK Securities regarding the operation of trust and wrap account products. This follows allegations that SK Securities violated the Capital Markets Act by paying settlement money with the nature of loss compensation to corporations and individual investors.

The issue arose from SK Securities' wrap and trust products. When valuation losses occurred during maturity-mismatched operations, some corporate and individual investors requested redemptions, but SK Securities did not comply. SK Securities explained, "The maturity-mismatched operation method was detailed in the trust contract. However, considering the responsibility for not promptly responding to investors' redemption requests and insufficient notification regarding matters necessary for maturity extension, we reached a settlement."

Securities firms customarily attract customer funds through short-term products such as Money Market Wraps (MMW) and bond-type trusts. These funds were managed by investing in long-term bonds to increase yields, but many suffered significant valuation losses as the base interest rate sharply rose last year.

In particular, the market interest rate surged following Gangwon Province's refusal to provide payment guarantees in the second half of last year. Long-term bond prices plummeted, and securities firms tied up in real estate project financing (PF) funds faced liquidity crises, leading to redemption suspension incidents where they could not return investment funds to customers whose maturities had come due.

SK Securities is also known to have recorded valuation losses amounting to hundreds of billions of won by engaging in rollover transactions such as selling short-term commercial papers (CP) to manage the profitability of trust products. In this process, they failed to return funds to corporate clients whose maturities had arrived and did not properly respond to investors' redemption requests.

After suffering damages from SK Securities' unilateral redemption extensions, some corporate and individual investors prepared civil lawsuits against SK Securities. In response, SK Securities proposed a settlement amount corresponding to the losses on the condition that no lawsuits would be filed, reaching an agreement in March this year.