Preparing 'Korea Value-Up TR Index' ETN
Temporarily Suspended Last Month Due to '130 Billion Won Loss Incident'
Estimated Impact from FSC LP Inspection and Others
Shinhan Investment Corp., the third-largest domestic issuer of Exchange Traded Notes (ETNs), is currently suffering from the aftermath of a "130 billion KRW futures trading loss incident." Since the department where the incident occurred was responsible for liquidity provision (LP) for Exchange Traded Funds (ETFs), it is observed that the ETN operations, which also require LP roles, are being affected.
According to the financial investment industry on the 5th, Shinhan Investment Corp. had been conducting preliminary consultations before submitting an application for preliminary listing review to the Korea Exchange to launch an ETN tracking the "Korea Value-Up TR (Total Return) Index," but halted preparations for the product launch after the incident last month. ETNs are derivative-linked securities issued by securities firms that link the returns to an underlying index.
In the market, it was expected that major ETN market players like Samsung Securities and Shinhan Investment Corp. would support the government's Value-Up policy by launching Value-Up ETN products. However, with Shinhan Investment Corp. not launching the product, among the 13 ETPs (ETFs and ETNs) tracking the Value-Up index, only Samsung Securities' "Samsung Korea Value-Up TR ETN" was included as an ETN product. It was also presumed that Shinhan would release a similar 10-year maturity TR index tracking product.
Although the ETF LP department and the ETN LP department within Shinhan Investment Corp. belong to separate groups, it is observed that both are affected as the Financial Supervisory Service (FSS) has started a company-wide inspection centered on the ETF LP department. Last month, an employee A in the ETF LP department under the International Sales Division of Shinhan Investment Corp.'s Wholesale Group incurred a loss of 135.7 billion KRW due to on-exchange futures trading unrelated to the original purpose. The LP operations themselves were paralyzed. The head of the Wholesale Group, Yuseong-yeol, and the head of the International Sales Division, Lim Tae-hoon, who were the senior managers of the problematic department, were dismissed from their positions in mid-last month.
Like ETFs, liquidity provision is essential for ETNs. LPs act as market participants who continuously provide bid and ask quotes to ensure smooth trading of financial products. A financial investment industry insider said, "In the domestic market, securities firms issuing ETNs usually also perform LP duties, so competition among large firms is common," adding, "It appears that Shinhan's external trust in LP operations has significantly declined due to this incident."
There is also a possibility that this could affect the domestic ETN competitive landscape, as the market share differences are not large. As of the end of October, Samsung Securities holds the highest ETN market share among domestic issuers at 15.48%, followed closely by Meritz Securities (14.45%), Shinhan Investment Corp. (13.78%), Korea Investment & Securities (12.72%), and NH Investment & Securities (12.27%).
The FSS has announced a severe disciplinary action against Shinhan Investment Corp. Ham Yong-il, Deputy Director of the Capital Markets Division at the FSS, stated at a briefing on capital market issues on the 31st of last month regarding Shinhan Investment Corp., "If the risk or compliance control functions did not operate, then horizontal controls also failed," emphasizing, "If both vertical and horizontal controls fail simultaneously, this should be regarded as a fatal design and operational flaw of the company."
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