(LEAD) Financial firms to be under scrutiny over controversial derivative products

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SEOUL, Aug. 22 (Yonhap) -- South Korea's financial regulator said Thursday it will begin inspecting financial firms later this week over sales of controversial derivative products that carry the risk of losing nearly all investment.

Choi Jong-ku, chairman of the Financial Services Commission (FSC), told lawmakers that financial authorities will start an inspection into banks and brokerages Friday over sales of the derivative products linked to foreign interest rates.

Choi did not give details of the planned inspection but noted, "Many investors stand to lose a lot of money" over their investment into the high-risk derivative products.

FSC officials have said they would launch arbitration proceedings between financial firms and investors if the inspection is over.

Choi told lawmakers that financial firms could be held accountable if they are found to sell the derivative products without properly notifying investors of higher risks.

Officials said 3,654 individual investors and 188 businesses were found to have bought 822.4 billion won (US$677.8 million) worth of such derivative products as of Aug. 7.

Such derivative products are structured to track the performance of constant maturity swaps, 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 products turned into losers as bond yields in the U.S., Britain and Germany have unexpectedly sank amid speculation that central banks in major economies may aggressively slash their interest rates.

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

Risks of losses will be higher if the United States and Britain cut interest rates again this year.

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, officials said.

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

The Financial Consumer Agency, a nonprofit organization that promotes the rights of financial customers, said it will ask prosecutors to open a criminal probe into chief executives of Woori Bank and KEB Hana Bank over the sales of derivative products.

In a statement, the organization said it will file a complaint with prosecutors by the end of this month.

kdh@yna.co.kr
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