South Korean regulators plan to step up oversight of structured products such as equity-linked securities, or ELS, starting next month, according to Bloomberg. Under the planned rules, brokerages would need to warn investors when products approach principal-loss trigger levels and reassess product design and sales practices when risks rise sharply. The move comes after a historic selloff in South Korean equities, but retail appetite for risk has not faded. Instead, individual investors have shifted toward more complex structured products in search of higher returns. ELS offering annual coupon rates of 40% to 50% have drawn fresh retail money, with July sales climbing to the highest level in more than three years. Notes tied to Samsung Electronics and SK Hynix posted the clearest increase. Bloomberg also said funds did not truly leave the market after losses and forced liquidations in single-stock leveraged ETFs. They moved instead into products that appear to offer fixed high yields, even though many high-coupon ELS include knock-in clauses that can expose investors to heavy principal losses if the underlying shares fall below preset levels.
South Korean regulators plan to tighten oversight of structured products such as equity-linked securities, or ELS, starting next month, according to Bloomberg.
Under the proposed measures, brokerages would be required to alert investors when a product approaches the trigger level for principal loss. They would also need to reassess product design and sales when risks rise clearly.
The planned crackdown comes after a historic selloff in South Korea’s stock market. Retail investors, though, have not pulled back from risk. Bloomberg said they have shifted toward more complex structured products in pursuit of higher returns.
Equity-linked securities offering annual coupon rates of 40% to 50% have again attracted large amounts of retail money. Sales in July rose to the highest level in more than three years, with the strongest growth seen in notes tied to Samsung Electronics and SK Hynix.
The report said money did not truly leave the market after blowups and forced liquidations in single-stock leveraged ETFs. Instead, it moved into structured products that appear to offer fixed high yields.
Those high-yield ELS often carry knock-in clauses. If the underlying share price falls below a preset level, investors can face substantial principal losses. Bloomberg added that the earlier leveraged ETF crisis had already inflicted heavy losses on younger South Korean investors, and the rise in high-coupon ELS may be reproducing a similar risk structure.
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