Two years have passed since the significant losses related to Hong Kong's equity-linked securities (ELS) raised concerns in the market. Once facing calls for elimination, ELS has regained investor interest. Enhanced investor protection regulations have led to more conservative product structures and sales processes, while the current high-interest and high-volatility environment has increased the appeal of ELS.
In a recent interview with Aju Economy, Kim Jung-hyuk, head of the derivatives team at Meritz Securities, stated, "Today's ELS is entirely different from what it was two years ago. Following the Hong Kong H Index crisis, ELS has evolved rather than disappeared, focusing on strengthening investor protection."
The most significant change since the crisis has been in product structure. Previously, products with a knock-in barrier of 45-50% were common, but now more conservative structures dominate, with index-based products at 20-30% and individual stock products at 15-20%. A knock-in refers to a threshold below which the underlying asset's price must fall to trigger potential principal loss.
Kim explained, "In the past, we offered high coupons even at a 50% knock-in level, but now we design the structure much more conservatively. While trading burdens have increased, the industry has voluntarily enhanced safety to restore market trust."
The sales process has also been significantly strengthened. Viewing a video before subscribing to complex financial products is now mandatory, and starting this year, the revised standard investment recommendation guidelines require a reassessment of investor suitability (KYC) each time a product is recommended. The addition of a reflection period and confirmation of subscription intent has made the actual subscription process considerably time-consuming. Financial authorities and the industry continue to discuss further consumer protection measures.
He noted, "Previously, the focus was on understanding the product itself, but now the process has become much more thorough in ensuring that investors fully comprehend it. The sales process is far stricter than before."
Kim emphasized that the current market environment is actually favorable for ELS. Generally, as market volatility increases, option premiums rise, and since ELS involves investors selling options, this can be utilized as a source for coupon payments.
He stated, "In the past, ELS linked to the KOSPI index offered coupons of 5-7% annually, but now we can design products that provide annual coupons of 20-30% while lowering the knock-in to around 30% by leveraging high volatility. The recent changes in ELS involve not just raising coupons due to increased volatility but also maintaining expected returns at a certain level while making products safer by lowering knock-ins."
He added, "If you feel that stock prices have risen too much to invest directly, and you believe that companies like Samsung Electronics or SK Hynix are unlikely to drop more than 70% within three years, ELS can be a viable alternative. ELS is not a product designed to maximize upside returns but rather a structured product that seeks coupon income while managing downside risks."
The market dynamics are also shifting. Currently, about 60-70% of ELS issuances are still index-based, but the proportion of 'KOSPI Single' products, which use the KOSPI single index as the underlying asset, is rapidly increasing. This structure is easier for investors to understand and can secure sufficient product appeal based solely on domestic market volatility, unlike the previous requirement for multiple indices to meet early redemption conditions.
In the individual stock category, products based on Samsung Electronics and SK Hynix have become new mainstays. In June, the issuance scale of ELS including Samsung Electronics and SK Hynix reached approximately 650 billion won.
Kim remarked, "Previously, the focus was on overseas tech stocks or indices, but now there is a growing preference for products utilizing domestic semiconductor leaders. The combination of high volatility and interest rates has enhanced the competitiveness of ELS based on domestic assets." He concluded, "If you want to manage the burden of high prices while seeking stable returns, the current ELS can be a highly competitive investment alternative."
However, he advised against investing solely based on high coupons.
Kim cautioned, "A lower coupon can indicate a product designed with greater stability. For first-time investors, it is advisable to start with products offering the lowest coupons in small amounts to gain experience, rather than investing a large sum all at once. Diversifying investments over time is preferable."
* This article has been translated by AI.
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