Investors Sue Banks for Losses on Risky Derivatives
26 September, 2019
Korean investors are suing banks for mis-selling them short-term derivative-linked securities involving German sovereign bond yields.
Investors who parked their money in the DLS in late May this year lost an average of W200 million in the course of just four months (US$1=W1,200). Now they have grouped together to sue Woori and KEB Hana banks seeking to nullify their investment contracts and are protesting in front of the banks' headquarters and the Financial Supervisory Service.
According to financial industry sources, the loss rate from German bond DLS maturing on Thursday reached 98.1 percent.
Forty-four investors spent a total of W8.3 billion on the product at an average of W200 million each after the banks promised them annual interest of 4.2 percent within four months.
Instead, they will get back only W3.8 million -- the remaining 1.9 percent -- while the banks lose nothing.
Woori Bank sold the product from May 17 to 23. At that time, the 10-year German sovereign bond yields it was linked to had already entered negative territory and alarm bells were ringing.
But the bank promised investors their money back plus interest if the bond yields did not fall below -0.3 percent.
The DLS was designed to incur losses in the principal if yields fell below -0.3 percent on maturity. If yields fell below -0.6 percent, investors stood to lose all their money.
In the end yields tumbled to -0.619 percent.
In the case of German bond DLS that matured last Thursday, yields rebounded somewhat, allowing investors to recoup at least some 40 percent of their money. But they plunged again the following week.
More than W600 billion worth of investments remain locked in German bond DLS maturing next year.
In the case of KEB Hana Bank, U.S. and U.K. interest rate derivative products that matured Wednesday incurred a loss rate of 46.1 percent.
The Financial Consumer Agency and specialist law firm Logos filed lawsuits against Woori and Hana banks on Wednesday seeking to nullify the investment contracts and demanding full compensation.
The FCA accuses Woori Bank of fraud by fooling investors who were looking for safe-haven investments into parking their money in risky products and presenting them with false investment reports.
It accuses the bank of failing to inform investors of plummeting German sovereign bond yields and "denying them the chance to redeem their investments."
Source:
TAG(s):