S.Korea's DLS incurring losses due to stock slump exceed $800 billion

South Korea's derivatives-linked securities that entered the knock-in or loss period due to stock slumps at home and abroad exceeded 1 trillion won ($800 billion) in the third quarter last year.

The Financial Supervisory Service on Sunday released this information through a report on the issuance and operation of derivative-linked securities by brokerages in last year's third quarter, when such stocks in the knock-in phase were worth a combined 1.6 trillion won.

The majority 63.3% of the knock-in balance was due to equity-linked securities (ELS) linked to the Hong Kong H index, which comprises 50 large-cap stocks such as Tencent and Alibaba among the shares of mainland Chinese corporations listed on the Stock Exchange of Hong Kong.

In addition, 923.3 billion won or 86.7% of the knock-in amount will mature in 2024, with 62 billion won due last year and 25 billion won this year.

Index-type ELS products sold in Korea evaluate if the price of an underlying asset meets the criteria for early redemption on a six-month basis and allow early repayment if the conditions are met.

If the underlying index recovers before maturity, loss of principal can be avoided based on maturity repayment conditions, but this requires attention to investment given the potential for loss of principal depending on underlying asset price and maturity repayment conditions.

Write to Tae-Ung Bae at btu104@hankyung.com