Last Year’s Derivative-Linked Securities Issuance and Redemption Increased... 92% of ELS Knock-Ins Were 'H Index'

Financial Supervisory Service, 2023 Securities Firms' Derivative-Linked Securities Issuance and Management Status
Redemption Amount Exceeds Issuance Amount Amid Pivot Expectations

Financial Supervisory Service, Yeouido, Seoul. Photo by Younghan Heo younghan@

Last year, the redemption amount received from derivative-linked securities (DLS) investments exceeded the issuance amount amid expectations of interest rate cuts by the U.S. Federal Reserve (Fed). Among equity-linked securities (ELS) that entered the principal loss possibility zone (Knock-In), 92.6% were based on the Hong Kong H Index (Hang Seng China Enterprises Index, HSCEI).

According to the "2023 Securities Companies' Derivative-Linked Securities Issuance and Operation Status" released by the Financial Supervisory Service on the 19th, the issuance amount of DLS was KRW 78.9 trillion, an increase of KRW 4.7 trillion compared to the same period last year. During the same period, the redemption amount rose by KRW 31.9 trillion to KRW 83.9 trillion.

The fact that the redemption amount exceeded the issuance amount is interpreted as reflecting expectations of a pivot (direction change). A Financial Supervisory Service official explained, "With expectations of easing monetary tightening, global stock markets generally showed strength, increasing investment demand and redemptions (early and maturity redemptions), which expanded both issuance and redemption."

As the redemption amount surpassed the issuance amount, the overall outstanding balance decreased. As of the end of last year, the total outstanding balance of DLS recorded KRW 96.3 trillion, down KRW 7.9 trillion compared to the previous year.

The issuance amount of index-type ELS was KRW 32.2 trillion, up KRW 1.2 trillion from KRW 31 trillion the previous year. Its share decreased by 2.4 percentage points to 51.3% from 53.7% the previous year. The issuance amount of stock-type ELS increased by KRW 4.2 trillion to KRW 25.7 trillion from KRW 21.5 trillion the previous year. Its share rose by 3.5 percentage points to 40.8% from 37.3% the previous year.

Due to decreased investment demand for ELS based on the Hong Kong H Index, issuance of stock-type ELS, which generally have higher volatility, increased to raise coupon yields. The issuance amount of mixed-type ELS was KRW 5 trillion, down KRW 200 billion from KRW 5.2 trillion the previous year. Its share decreased by 1.1 percentage points to 7.9% from 9.0% the previous year.

As of the end of last year, the outstanding balance of ELS that triggered Knock-In was KRW 6.6 trillion. This accounts for about 6.5% of the total DLS outstanding balance, with ELS effectively comprising the entire portion.

By underlying asset, most ELS were based on the Hong Kong H Index (KRW 6.1 trillion, 92.6%). Maturities mainly fall in 2024 (KRW 6.1 trillion, 99.6%).