FSC preparing protective measures for ELS investors

The South Korean financial regulator is preparing measures to protect investors of equity-linked securities, known as ELS, and these will be announced by November, the regulator chief said Monday.

“As ELS issuances soar, problems with investor protection and the fiscal soundness of securities brokerages are being highlighted,” said Yim Jong-yong, chairman of the Financial Services Commission, at a press conference in Gwanghwamun, central Seoul. 

Total ELS issuances stood at 101.4 trillion won ($91 billion) as of August, spiking from 22.3 trillion won in late 2010, as investors seeking higher interest flocked to securities riskier than ordinary bank products amid the ongoing low interest rate policy.

“The measures will include careful deliberation of the qualifications of retail investors and systemizing stress tests on securities firms that issue ELS,” the FSC chairman said.

This year marks the 20th anniversary of Korea’s financial derivative market that was established in 1996. In 2011, the Korean market took up the No. 1 spot in terms of transaction volume. However, it has since shrunk significantly due to increasing regulations year after year.

The FSC is preparing multipronged measures to improve the global competitiveness of the market, it said.

“Korea is the world’s 11th largest economy and its derivative market is the 12th biggest,” Yim said. “The size of the market is considered adequate for our economy, but the quality of the market needs to catch up with other advanced markets.”

As of this June, the daily average transaction volume stood at 41.9 trillion won, the FSC data showed. The number of derivative products was 31 as of late last year, far fewer than the 1,441 in the US market and 72 in Japan.

“Some critics say Korean derivatives lack variety in type and entry barriers for players are still stiff,” Yim said. “While maintaining the principle to protect investors, the regulator will try to lower entry barriers in a reasonable manner, for example, by simplifying listing procedures of derivatives and encouraging financial institutions to develop more creative products.”

As for the Hanmi Pharmaceutical scandal, which involved retail investors suffering severe losses from allegedly unfair stock transactions among some institutional investors who might have used undisclosed information, the FSC chief said his commission is closely investigating the matter.

At a parliamentary audit last week, Yim had said the regulator will overhaul the nation’s short-selling rules. But on Monday, he took a step back and said, “It is not desirable to put excessive regulations on short-selling.”

“The key question in this scandal is not the short-selling itself,” Yim said. “It is a globally recognized method for stock investment and regulating the method would left the market contracted.”

An announcement on Sept. 30 about the termination of a partnership between Hanmi and Germany’s Boehringer Ingelheim on sharing a license to manufacture a cancer-fighting drug left retail investors out of the loop for the first 30 minutes after the market opened.

Institutional investors, in the meantime, reaped profits from short-selling stocks of the No. 1 Korean pharmaceuticals firm.

“It is impossible to scrap short-selling, since the Korean market is a global market with about 30 to 40 percent (of it) being occupied by foreign investors,” the chairman added. “Requiring short-sellers to disclose their transactions doesn’t make sense either, because that sounds to investors as absurd as revealing their personal investment portfolios.”

The joint inspection involving the FSC, Financial Supervisory Service and Korea Exchange on the Hanmi case will focus on the possible abuse of undisclosed information among insiders and information leaks to limited investors, the chairman said. 
By Song Su-hyun  (song@heraldcorp.com)