Watchdog should clarify where responsibility for losses lies
People who invested more than 800 billion won ($661 million) into a derivatives-linked fund (DLF) are about to lose their principal. The Financial Supervisory Service has decided to launch a joint inspection of securities companies that designed the financial product and the banks that sold it.
In principal, investors should take responsibility for investing into derivatives products that incur losses. However, the financial authorities should investigate possible "mis-selling" by banks through underestimating risks and providing overly optimistic information, and sternly punish them if violations are found.
DLFs are comprised of derivatives-linked securities (DLS), which refer to financial products structured to track the performances of underlying assets such as interest rates and government-issued bond yields. Movements of those underlying assets determine their returns.
In a recent example, the DLF sold by Woori Bank from March to May last year was a product that invested in DLS tied to Germany's 10-year government bonds. Investors get 4 percent to 5 percent in returns if their yields do not fall below -0.2 percent. If the yield falls below -0.2 percent, however, the investors face losses 200 times the difference in the interest rate. Last week, the yield on 10-year German bonds went below -0.7 percent, a level at which investors faced a 100 percent loss.
Above all, the sellers of this DLF ― Woori, KEB Hana and KB banks and three brokerage houses ― should make clear whether they informed investors of state bonds' interest rate trends and the risks of loss. If they failed to explain the possibility of loss sufficiently, it amounts to "mis-selling." If they had played down the chances of loss while exaggerating profitability in the process, that also constitutes mis-selling.
If Woori and KEB Hana are found to have mis-sold the product, a class action suit is likely to follow. Up to 90 percent of the investors are individuals, including retirees, each of whom put an average of 100 million won for between three and four months. If they end up losing their principal, it will cause a big social stir. The financial watchdog should conduct a thorough investigation and address the issue of where the responsibility lies, to minimize damages suffered by innocent investors.
People who invested more than 800 billion won ($661 million) into a derivatives-linked fund (DLF) are about to lose their principal. The Financial Supervisory Service has decided to launch a joint inspection of securities companies that designed the financial product and the banks that sold it.
In principal, investors should take responsibility for investing into derivatives products that incur losses. However, the financial authorities should investigate possible "mis-selling" by banks through underestimating risks and providing overly optimistic information, and sternly punish them if violations are found.
DLFs are comprised of derivatives-linked securities (DLS), which refer to financial products structured to track the performances of underlying assets such as interest rates and government-issued bond yields. Movements of those underlying assets determine their returns.
In a recent example, the DLF sold by Woori Bank from March to May last year was a product that invested in DLS tied to Germany's 10-year government bonds. Investors get 4 percent to 5 percent in returns if their yields do not fall below -0.2 percent. If the yield falls below -0.2 percent, however, the investors face losses 200 times the difference in the interest rate. Last week, the yield on 10-year German bonds went below -0.7 percent, a level at which investors faced a 100 percent loss.
Above all, the sellers of this DLF ― Woori, KEB Hana and KB banks and three brokerage houses ― should make clear whether they informed investors of state bonds' interest rate trends and the risks of loss. If they failed to explain the possibility of loss sufficiently, it amounts to "mis-selling." If they had played down the chances of loss while exaggerating profitability in the process, that also constitutes mis-selling.
If Woori and KEB Hana are found to have mis-sold the product, a class action suit is likely to follow. Up to 90 percent of the investors are individuals, including retirees, each of whom put an average of 100 million won for between three and four months. If they end up losing their principal, it will cause a big social stir. The financial watchdog should conduct a thorough investigation and address the issue of where the responsibility lies, to minimize damages suffered by innocent investors.
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