By Park Hyong-ki
Staff Reporter

The financial meltdown on Wall Street is deteriorating the local market for trading of derivatives products such as equity-linked securities (ELS) and equity-linked funds (ELF).

Such products have been favored as alternative tools among retail investors for hedging risks against increasing volatility.

However, the recent fallout among global investment banks on Wall Street is undermining investor confidence in derivatives products mostly developed by former top brokerages such as Lehman Brothers and Merrill Lynch.

With the demise of Lehman, a number of investment companies, including Samsung Investment Trust and Woori CS, announced that they will postpone the redemption of ELF products.

This has dealt a serious blow to retail investors and local investment and brokerage firms in issuing derivatives products.

This month, securities and asset management companies are seeing the number of investments in ELS and ELF declining sharply on the global credit crunch.

According to the Financial Supervisory Service (FSS), the industry only saw 79 billion won of fresh investment in ELS products last week, down from 220 billion won a week before.

Analysts say the fall of Lehman has rushed investors to redeem their ELS investments.
This is in stark contrast to investments made at the end of last month, which stood at 457 billion won.

It was pretty much the same on the ELF market as well, with fresh investment declining to about 149 billion won, from 277 billion won, compared with 501 billion won at the end of August.

Given that 80 percent of derivatives products such as ELS are developed by global investment banks and marketed through domestic brokerage houses, market watchers are cautiously warning against possible risks of default following the collapse of Lehman.

The exposure to Lehman's derivatives products of local financial companies is estimated to be around $390 million, while exposure to Merrill's derivatives is $370 million.

Bank of America, the U.S.'s largest retail bank, has agreed to take over Merrill, while Barclays, a British bank, will acquire several units of Lehman operations.

``We will closely monitor the situation to prevent losses for local customers and financial companies,'' said Hong Young-man, director general of the Financial Services Commission, who is heading a joint task force with the FSS.

phk@koreatimes.co.kr