The market for derivative-linked securities, which had been subdued by the shock of the Hong Kong H-share Index debacle, is regaining momentum, helped by gains in domestic and overseas stock markets. As so-called "medium risk, medium revenue" funds, which seek additional returns above deposits rates while protecting principal as much as possible, pour in, both issuance and outstanding balances are rising together.
According to the Financial Supervisory Service, the outstanding balance of derivative-linked securities in the third quarter of this year was 89.5 trillion won, up 2.4 trillion won from the previous quarter. Issuance (19.8 trillion won) outpaced redemptions (16.3 trillion won), expanding the overall size.
Derivative-linked securities are securities whose rate of return is determined by price fluctuations of underlying assets such as stock prices, interest rates, exchange rates, crude oil and grains. Products that use stock prices or indexes as underlying assets generally include equity-linked securities (ELS) and equity-linked bonds (ELB). When bonds, commodities or exchange rates are the underlying assets, they are called derivative-linked securities (DLS) and derivative-linked bonds (DLB). The FSS released data this time that collectively refers to ELS, ELB, DLS and DLB as derivative-linked securities.
In particular, the revival of equity-linked securities (ELS) stands out. As domestic and overseas stocks rose in the third quarter of this year, demand for ELS investment increased, with ELS issuance rising 3.4 trillion won (35.9%) from a year earlier to 12.8 trillion won. Principal-guaranteed types came to 7 trillion won, up 1.8 trillion won (34.9%) on-year, while non-principal-guaranteed types also increased by 1.5 trillion won (37.1%) from a year earlier.
By underlying asset, the KOSPI200 accounted for 5.6 trillion won, the S&P 500 for 4.1 trillion won, the Euro Stoxx 50 for 3.6 trillion won and the Nikkei 225 for 1.4 trillion won. As the Korean and U.S. stock markets continued to rise, demand increased for ELS based on the KOSPI200 and the S&P 500.
DLS issuance totaled 7.1 trillion won in the third quarter of this year, up 2.3 trillion won from a year earlier. Of that, principal-guaranteed issuance came to 5.8 trillion won, up 2 trillion won on-year. This was due to increased investor demand seeking excess revenue over deposits products.
ELS investment gains in the third quarter were 5.4% per year, up 4.6 percentage points (p) from a year earlier. The DLS investment return also rose 0.2 percentage point from a year earlier to 2.2% per year.
The FSS said, "If the recent upward trend in domestic and overseas stock markets holds, ELS issuance is expected to continue increasing for the time being," adding, "However, considering concerns about investor losses due to increased global market volatility, we will strengthen monitoring of ELS issuance trends and other factors."