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High risk private equity DLF, ELF and funds disappear next bank window

The DLF and the high-risk derivatives confidence issued by private equity will disappear from banks next year.

As a result, banks are expected to turn into a sales channel driven by public funds with relatively little loss to major and well-protected investors.

On Friday, financial authorities decided to restrict the sale of high-risk private funds and the trust of banks by introducing comprehensive measures to boost investor protection against high-risk financial instruments.

To this end, we have introduced a new concept of "high level financial investment products".

This includes derivative products that are difficult for investors to understand and may lose more than 20% of their capital.

The financial authorities cited four banks banned from selling to banks: DLF, an ELF stock-linked fund, derivatives-related securities and DLT trusts and ELT stock-based trusts.

DLF and DLT refer to derivatives-related securities DLS and ELF and ELT to equity-linked securities, LSGUs, respectively.

LSGU is a derivative of equity, while DLS is a derivative instrument of interest rates, loans, commodities and exchange rates.

These instruments are designed to guarantee the promised rate of return if the underlying asset price fluctuates over a period of time but loses its principal if it is out of range.

Financial instruments that comprise over 20% of the principal among risk classes are classified as ultra high risk.

As of the end of June, securitized derivatives with a risk of loss of more than 20% of the principal amounted to 74.4 trillion won.

The financial authorities are currently considering private equity funds outside the high-risk DLFs sold by commercial banks.

Competition funds that offer better protection for investors, such as securities filing and applying for various investment obligations, are not regulated.

Therefore, in order for banks to sell DLF and ELF products, the product design structure must be changed to take the form of a public offering or not subject to the "high level financial investment products" standard.

A Financial Services Commission spokesman said: "When we look at the unsecured DLF and ELF sold by banks, most products with a probability of over 20% will lose their principles." I expect a lot of new products that are not coming out. "

However, it is not known whether the product will meet the needs of investors who want higher profits amid low interest rates.

Lower risk means lower return, which means the product sells properly.

Hwang Se-woon, a researcher at the Capital Market Institute, said: "If you design a product to increase stability without producing products, it will be excluded from high quality products, but it is not easy to design 5 % yield ". If you make such a product in China, it might not sell well. "

High-risk trust products are restricted from selling to a bank, whether collateral or private placement.

Another official from the Financial Services Commission explained, "If you can't sell high quality private funds, you can get into a trust product and prevent high trust."

The bank's ban on the sale of high quality private funds and funds will take effect as soon as the revision of the bank law is completed in the first quarter of next year.

Banks are concerned about the deterioration of profitability in response to financial authorities.

This is when the number of derivatives and trust funds that sell more than deposit interest rates increases.

A commercial bank official said: "It is a very intense move."

Some have argued that market turmoil will be inevitable for some time, even if the bank itself decides whether it is a heavy product for financial investment.

The Financial Services Commission plans to present specific criteria for determining heavy financial investment products, after a two-week period of opinion.

In addition, the Financial Services Commission's view is that if it is difficult for a financial company to determine whether a product is difficult, it will set up a consumer-friendly committee and make its own judgment.

Once a code of conduct is created for high-end financial investment products, it will not be difficult to set up a consumer judgment committee.

Some say the bans on heavy private banks will have a negative impact on consumer choice and access to the product.

Securities firms may benefit from blocking bank sales, but given the broad network of bank sales, securities firms have the restriction to replace client demand.

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