South Korea Plans to Strengthen High-Yield Stock-Linked Notes Regulation in September, Retail Investors Turning to Complex Structured Products in Search of Higher Returns

BlockBeats News, August 23rd. According to Bloomberg, South Korean regulators plan to enhance supervision of structured products such as Equity Linked Securities (ELS) starting next month. Brokers will be required to warn investors when the product approaches the principal loss trigger and to reassess product design and sales when the risk significantly increases.

After a recent historic sell-off in the Korean stock market, retail investors' risk appetite has not diminished but has instead shifted towards more complex structured products in search of higher returns. Equity Linked Securities offering a 40% to 50% annualized coupon have attracted a large amount of retail funds again, with sales in July reaching a three-year high. Notes linked to Samsung Electronics and SK Hynix saw the most significant growth.

Following the liquidation of leveraged ETFs and forced selling in individual stocks, Korean retail investors did not withdraw their funds from the market but instead moved towards structured products that seemingly offer fixed high returns. However, these high-yield ELS products usually come with knock-in clauses, where investors may face significant principal losses if the underlying stock price falls below the agreed price. The previous leveraged ETF crisis had already caused substantial losses to young Korean investors, and the surge in high-yield ELS may be replicating a similar risk structure.