Financial regulator to check on banks' sales of certain derivative products

SEOUL, Aug. 19 (Yonhap) -- South Korea's financial regulator said Monday it will check on banks' sale of certain derivative products after local investors appear likely to report a huge loss.

The Financial Supervisory Service (FSS) said 3,654 individual investors and 188 businesses were found to have bought 822.4 billion won (US$677.8 million) worth of so-called "derivatives-linked fund" options sold by banks as of Aug. 7.

Such derivative products are structured to track the performance of constant maturity swap, or a swap that allows the purchaser to fix the duration of received flows on a swap, of Treasury bonds of the United States and Britain and the yield of Germany's 10-year state bonds.

The options turned into losers as bond yields in the U.S., Britain and Germany have unexpectedly sank amid speculations that central banks in major economies may aggressively slash their interest rates.

Media reports said some investors bought the options because they were believed to have invested into government bonds of the U.S., Britain and Germany.

"Financial authorities will launch a joint supervision into banks over the sale of derivative products that are linked to foreign interest rates," the FSS said in a statement.

The authorities will look into whether banks are complying with their obligations of sales, such as informing customers of the risk, the FSS said.

A total of 26 complaints were filed with the FSS over allegations of mis-selling of the derivative products.

If the constant maturity swaps of U.S. and British government bonds keep the current level, local investors will report about 56-percent loss from their investment, the FSS said.

Risks of losses will be higher if the U.S. and Britain cut interest rates again this year, according to the FSS.

In the case of options that are linked to Germany's 10-year government bonds, local investors are likely to report a 95-percent loss, the FSS said.

Derivative products do not guarantee the principle, as investors prefer instruments that promise higher yields.

Woori Bank and KEB Hana Bank sold 401.2 billion won and 387.6 billion won worth of the derivative products, respectively, the FSS said.

KB Kookmin Bank, Yuanta Securities Korea and Mirae Asset Daewoo Securities sold 26.2 billion won, 5 billion won and 1.3 billion won worth of the derivative products, respectively, according to the FSS.

kdh@yna.co.kr
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