SEOUL, Oct. 14 (Korea Bizwire) — High-risk financial instruments that are designed to bet on Hong Kong’s stock market need to be carefully monitored amid concerns about potential losses, as massive democracy protests there have wobbled financial markets, an industry source said Monday.
At the end of September, the outstanding amount of equity-linked trusts (ELTs) that track the Hong Kong Stock Exchange’s Hang Seng China Enterprises Index (HSCEI) stood at 32.7 trillion won (US$27.6 billion), according to the source.
Of them, the amount of Hong Kong-tied ELTs that were sold by four local banks, including KB Kookmin Bank and Shinhan Bank, stood at 25.6 trillion won.
The ELT is a type of equity-linked securities that are structured to track the performance of underlying assets, such as an individual stock and an index, not guaranteeing the principle as investors prefer instruments that promise higher yields.
Hong Kong’s stock index fell to 9,846.64 on Aug. 13, compared with a yearly peak of 11,848.98 on April 17.
The index recovered to 10,452.58 on Sept. 11, when Hong Kong’s leader, Carrie Lam, said her government will withdraw an extradition bill that has sparked months of protests.
So far, Hong Kong’s unrest has not triggered a “knock-in option” for most ELT products.
The option means that investors could lose principal if underlying equities fall below a pre-determined price before maturity.
Most ELT products are designed to trigger the option when Hong Kong’s stock index falls below 7,700 points, according to the source.
Experts, however, have noted that the ELTs are risky as investors can lose the principal if the stock markets plunge by more than 50 to 60 percent.
In the midst of the 2008 financial crisis, 70 percent of then sold equity-linked instruments suffered heavy losses as major stock markets nose-dived more than 50 percent.