By Park Hyong-ki
Staff Reporter
Concerns are rising over the massive sale of equity-linked securities (ELS) by domestic securities companies.
Over 80 percent of ELS products marketed by local brokerages originated from and are partially managed by global investment banks (IBs) such as UBS, Credit Suisse and Lehman Brothers.
Given that global IBs are coming under intense pressure to tackle the rising risks of default stemming from the global liquidity crunch, market watchers say domestic securities companies are not totally immune to the possible contagion.
When global firms collapse or go bankrupt, local brokerages will face default involving ELS issuances, and some say losses could amount to 10 trillion won.
However, the industry begs to differ, saying that risks concerning ELS have been assessed and verified prior to issuing derivatives products.
Also, it said the regulator constantly tells the securities industry to maintain sound risk management regarding all sorts of financial products.
``The financial authority constantly reminds the industry to keep its risk management under quality control,'' said a manager at a securities company. ``Companies assess risk concerning ELS and other financial products before striking a deal with foreign counterparts, and releasing them.''
He added that the industry is being restricted in doing business with global investment banks that face default not only by the regulator but also companies' internal risk management teams. Such banks are Bear Stearns and Lehman Brothers.
``We can't say that all ELS products are risk-free, and that goes the same for other investment products such as insurance and funds. Since I believe the industry is keen on risk assessment, the possible losses stated by market watchers are too pessimistic,'' the manager noted.
ELS products have become the best investment product lately amid a bearish stock market.
It offers investors a hedge to stock volatility and risks by investing in underlying equities through options.
According to the Financial Supervisory Service, the outstanding issuances of ELS reached 17 trillion won in the first seven months of this year, compared with 25 trillion won in total last year.
Daewoo Securities is the biggest marketer, issuing 3.5 trillion won, followed by Woori Investment & Securities with 3.3 trillion won and Korea Investment & Securities with 2.8 trillion won.
UBS, Credit Suisse, Merrill Lynch, Deutsche Bank, JPMorgan and Lehman Brothers have sealed ELS deals worth over 1 trillion won with local securities companies.
Korean brokerages began issuing ELS in 2003.
``The reason why brokerages here are dependent on global IBs for ELS is due to an insufficiency of human resources that can develop and manage the derivatives product,'' said Park Moon-seo, an analyst for Eugene Investment & Securities.