[Column] ETF Management Losses That No One Understands

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FSS Conducts Comprehensive Survey of Securities Industry

Shinhan Investment Corp. officially confirmed the loss from managing an exchange-traded fund (ETF) through a disclosure on the 10th. The confirmed loss amount reaches 130 billion KRW, which is close to the second quarter net profit (131.5 billion KRW). Shinhan Investment Corp. stated that it is still unclear whether the loss occurred due to market volatility during management or if it was caused by an incident involving regulatory violations.

Shinhan Investment Corp. explained, "Excessive losses occurred due to on-exchange futures trading that deviated from the purpose of ETF liquidity providers (LP)," and "We discovered that false swap transactions had been registered." The company appears cautious about definitively labeling this as a 'financial accident.'

However, the market is leaning toward the possibility of an 'accident.' To dispel such suspicions, one clear answer must be provided. A common point raised by financial investment industry insiders is the issue of 'false reporting.'

The securities industry finds it incomprehensible that the occurrence and scale of the loss were not properly reported. An employee of a securities firm said, "Large losses can occur during futures trading, and in such cases, it is mandatory to report to the team leader or department head to inform them of the loss scale," adding, "Registering a non-existent swap transaction instead of reporting the loss as it is, is unusual."

Some speculate that false reports were submitted in an attempt to recover losses during that period. This reflects how difficult it is to accept the false reporting explanation.

Furthermore, there are suspicions that the reporting system within the relevant department might be lax. Another securities firm employee said, "The Shinhan Investment Corp. Futures and Options Headquarters, where the loss occurred, pays performance bonuses by department, so individuals have little incentive to take excessive risks to generate profits, and thus little incentive to submit false reports." Based on this, doubts are raised about whether the sensitivity of team members to reporting omissions or fact minimization is significantly low.

A CEO of a securities firm also said, "In cases where futures trading for ETF hedging is done well, a separate book is provided and prop trading is approved to increase the scale of futures trading to generate profits. I heard Shinhan Investment Corp. is such a case," adding, "Having a large scale of futures trading may not be a problem, but false reporting of losses is hard to imagine."

Ultimately, even with a rational and neutral judgment, the issue returns to the internal reporting system problem within Shinhan Investment Corp. The industry is particularly surprised that such an incident occurred at a securities firm affiliated with a financial holding company. The fact that even reporting the facts was not properly done is a serious problem.

It is still difficult to judge whether this is an accident or a loss. Even if the outcome is simply an operational loss, Shinhan Investment Corp. will inevitably carry a 'trust' issue for some time.