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Regulator vows stern measures over improper sales of rates-tied derivatives

Finance 11:04 October 08, 2019

SEOUL, Oct. 8 (Yonhap) -- The head of the financial watchdog on Tuesday vowed stern punishment for financial firms responsible for improperly selling derivatives linked to overseas interest rates that carry the risk of losing nearly all the money invested in them.

Yoon Suk-heun, governor of the Financial Supervisory Service (FSS), told a parliamentary audit that financial firms showed negligence in investor protection when they sold the super-risky assets.

"(The FSS) will take stern measures against confirmed cases of violations and swiftly proceed with dispute reconciliation," Yoon told lawmakers.

FSS Gov. Yoon Suk-heun (front, L) speaks during a parliamentary audit on Oct. 8, 2019. (Yonhap)

Earlier this month, the FSS said about 20 percent of 3,954 cases detected may violate law or internal rules in selling the derivatives, but further investigation is needed into two leading lenders -- Woori Bank and KEB Hana Bank.

Some financial firms were suspected of failing to offer enough information to investors or of violating internal rules that protect elderly customers when they sold the derivatives, the FSS said.

Since mid-August, the FSS has been probing Woori Bank, KEB Hana Bank and brokerage firms and asset managers that sold the derivatives products linked to foreign interest rates.

As of Aug. 7, 3,021 individual investors and 222 businesses were found to have bought 795 billion won (US$662.9 million) worth of such products, the FSS said.

Of the 3,021 investors, the number of people aged 60 or above stood at 1,462, and they bought 346.4 billion won worth of derivatives, the FSS said.

The derivatives are structured to track the performance of constant maturity swaps -- swaps that allow the purchaser to fix the duration of received flows on a swap of Treasury bonds of the United States or Britain or 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 sunk 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 their current levels, local investors will report an approximately 52.3 percent loss from their investment, officials said.

The risk 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.

kdh@yna.co.kr
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