Hong Kong ELS victims may recoup 30 to 65 percent of losses

Investors in Hong Kong-tied derivative products may recoup 30-65% of their losses after committee arbitration.

Alleged victims of the equity-linked securities tied to the Hong Kong’s Hang Seng China Enterprises Index protest in front of the Financial Supervisory Service office in Yeouido, western Seoul, on Dec. 15. [YONHAP]

Some investors in troubled Hong Kong-tied derivative products will be eligible to recoup 30 to 65 percent of their total losses from the sellers, the financial regulator determined through a committee mediation.

The latest arbitration, the results of which were announced on Tuesday, involved five cases concerning five banks — KB Kookmin, Shinhan, NH NongHyup, Hana and Standard Chartered Korea — which the Financial Supervisory Service (FSS) chose as representative cases for each seller.

The suggested compensation ratio was based on guidelines for sellers of equity-linked securities (ELS) pegged to the movement of the Hang Seng China Enterprises Index (HSCEI) that were announced in March. The HSCEI reached more than 12,100 at its peak in February 2021 before collapsing to the 5,000 level in 2022. As of 3:30 p.m. Tuesday, the figure stood at around 6,760.

The arbitration concluded that sellers had breached their duty to sufficiently inform the customers in all five cases, which put the basic compensation ratio at 20 percent under the aforementioned guidelines.

The final compensation ratio varied from 30 to 65 percent by case depending on other factors such as whether sellers had violated other rules or traders had previous experience with similar products.

For example, the FSS recommended compensation of 65 percent for an investor in their 70s attempting to recoup an investment of 26 million won ($18,978) from NH NongHyup Bank. The agency determined that the bank had provided a distorted and misleading explanation of the risks related to Hong Kong-linked ELS, but it deducted five percentage points from the compensation ratio because the investor had previous experience trading equity-linked trust products.

The committee handed down a compensation ratio of 60 percent in KB Kookmin Bank’s case and figures of 55 percent for Shinhan Bank and Standard Chartered Bank Korea, as well as 30 percent for Hana Bank.

The agency expects the latest arbitration to “facilitate voluntary negotiation between the sellers and the consumers, as basic compensation ratios for each bank and the involved time period of the transaction have been disclosed clearly.”

The suggested resolution will be finalized if both the sellers and investors accept it within 20 days. Compensation ratios for other cases are currently being negotiated on a voluntary basis by involved sellers.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]