Exchange-linked securities tracking HSCEI lose $3mn as index plunges

An exchange-linked security (ELS) product in South Korea that tracks the Hang Seng China Enterprises Index (HSCEI) incurred more than 4 billion won ($3.1 million) in losses as the index plunged sharply since its introduction in 2021.

The losses may grow even larger as the value of relevant products maturing next year exceeds 13 trillion won at Korea’s five major banks - KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup.

According to the financial circle on Monday, an ELS product tracking the HSCEI sold at a local commercial bank incurred losses this month.

The amount due this month is about 10.3 billion won, and the loss is estimated at 4.03 billion won, resulting in a loss rate of 40 percent.

An ELS is linked to the underlying index to determine investment returns, and the price of the underlying asset is generally evaluated every six months for early repayment as needed.

If the price of the underlying asset falls below a certain threshold, a loss occurs. Banks have been selling ELSs in the form of equity-linked funds (ELFs) and equity-linked trusts (ELTs) through private and public offerings.

The losses came as the HSCEI has remained weak since the sale of the product in 2021.

The HSCEI is an index of 50 Chinese companies listed on the Hong Kong Stock Exchange and is known to be highly volatile.

The index, currently hovering around 6,000, surpassed the 12,000 mark in February 2021 but fell to the 8,000 range at the end of that year. It even plunged below the 5,000 mark in late October last year.

The problem is next year.

ELSs tracking the HSCEI were heavily issued in 2021 and they normally mature in three years while the latest loss-generating product matured in two and a half years.

Maturing ELFs and ELTs linked to the HSCEI at the top five banks will increase to about 9.04 trillion won in the first half of next year and 4.54 trillion won in the second half from 8.1 billion won excluding July losses in the second half of this year. The ones to mature next year alone amount to 13.58 trillion won.

The outstanding balance of ELSs tracking the HSCEI stood at 20.69 trillion won in June, according to the Korea Securities Depository.

As the knock-in threshold is usually set at 50 to 55 percent of the initial price and the early repayment threshold at 60 to 70 percent, many products should have reached the knock-in level and remain below the early repayment threshold.

“If the HSCEI fails to rebound significantly before maturity next year, some ELSs may be at risk of loss repayment,” said Chun Gyun, head of ETP research at Samsung Securities Co.

“Unlike its global peers, the Hong Kong stock market is undergoing a significant discount from its 10-year average,” said an official at a commercial bank. “Investor sentiment was at its lowest level in the first half of the year due to growing fears of a property crisis.”

The official noted, however, that the Chinese government has hinted at easing real estate regulations and taking stimulus measures and that investor sentiment may recover on a strong stimulus package.