SEOUL, Oct. 1 (Korea Bizwire) — South Korea’s financial regulator said Tuesday it has discovered 790 suspected cases of improper sales of derivatives linked to overseas interest rates that carry the risk of losing nearly all the money invested in them.
Announcing an interim outcome for its 40-day probe into banks and brokerages that sold the super-risky assets, the Financial Supervisory Service (FSS) said about 20 percent of 3,954 cases may violate law or internal rules, 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.
In a statement, the FSS said it will sternly punish financial firms if the suspected cases are confirmed, encouraging them to actively engage in dispute settlement processes with customers.
Won Seung-yeon, deputy governor of the FSS, told reporters that those investment losses “can happen to anyone” because the financial market is “still an uneven playing field” for ordinary investors.
Won said the FSS will decide on how much financial firms will pay in compensation after completing the probe.
As of Monday, about 200 investors applied for dispute reconciliation over sales of derivatives linked to overseas interest rates, FSS officials said.
Since mid-August, the FSS has probed 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.
A total of 643 investors aged 70 or above purchased 174.7 billion won worth of the products, it 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.