earticle

영어

Structured financial products have gained increasing popularity in Korea over the recent years, and complaints by investors of such products have also increased. In particular, retail investors have failed some lawsuits regarding equity-linked securities (ELS) issued by brokerage companies for their hedging behaviors, calling for stronger investor protection system to be in place in structured financial product markets. Such need for regulatory reform has inspired this study. In this paper, we hope to provide some insight into more effective regulatory guidelines to better protect retail investors who invest in such products as ELS and ELD (equity-linked deposits). In 2009, in fact, Korea Exchange (KRX) and financial supervisory authorities introduced a new set of the hedge guideline for ELS for better investor protection. The key points of this guideline are as follows. The KRX hedge guideline requires the issuing entities to distribute the sell orders for underlying assets held to hedge their ELS positions at a maturity date to protect asset prices from deviating from fundamental values or fair values. In general, the ELS issuers or financial institutions dynamically execute delta-hedging based on their ELS positions according to the changes in underlying asset prices. In this case, if ELS embeds nonlinear derivatives such as digital options or barrier options, the number of shares of underlying assets that the entities should sell at a maturity date can increase infinitely, making it nearly impossible for them to implement optimal hedging for their positions. As such, ELS hedgers often exploit the sell-orders for underlying assets at a maturity date by manipulating the underlying asset prices, which is of course an unethical trading behavior. To avoid this situation, KRX has introduced the new requirement on the ELS issuing financial companies to distribute the sell orders for underlying assets at the maturity date. However, the more fundamental problems that lead to most of the lawsuits against the ELS products stems from the structural complexity of the structured products, much more than from the unethical behaviors of financial companies. Such products’ complex make-up complicates hedging, consequently making it difficult for the companies to hedge efficiently. As aforementioned, most retail structured products are embedded of nonlinear derivatives, which have infinite delta at a certain point of underlying asset prices at a maturity date under continuous price environments. According to extant literature, including Stoimenov and Wikens (2005) and Bergstresser (2008), the more complexity of structured products results in the higher margins taken by issuing entities. Because of increasing difficulty in hedging for the complex structured products, they tend to set their margins at higher levels than they would otherwise when issuing new securities. Ku et al. (2007) also support this result based on the empirical analysis in Korean ELD markets. Therefore, the regulatory reform that demands for change only in the hedging method without considering the structural complexity of the structured products will not effectively resolve the problem. When issuing entities cannot hedge their assets efficiently, no matter how strict the relevant regulations become, they will continue to engage in unethical hedging behavior to transfer their potential losses to retail investors who are net buyers of structured products. In this paper, therefore, we propose a new regulatory initiative that restricts the maximum delta of structured products at a maturity date. The delta of structured products has two components: the delta per unit and the volume of sales. More specifically, the maximum delta (maximum sell orders at maturity) is determined by the product of maximum delta per unit and the volume of sales. Here, while in continuous prices the structured products embedded with barrier options or digital options have infinite delta per unit, in the consideration of tick size they have finite delta per unit. By restricting this maximum delta (maximum delta per unit times volume) of the structured products, therefore, the newly proposed regulation reduces the possibility for the underlying prices to be distorted by ELS issuers’ self-serving hedging behaviors. In sum, the regulation on structuring is related to both maximum delta per unit and sales volume. Even for a severely structured product, its (overall) maximum delta at a maturity date can be relatively small if its sales volume remains considerably small. Similarly, a less structured product can have large maximum delta at maturity if it has a bigger sales volume, thereby more likely to result in distortion of the underlying asset prices. Hence, for the effective protection of investors in structured financial products from their issuers’ abusive hedging practices, it is important for the new regulation to focus on the structuring of such complex financial products as well as on hedging behaviors of issuing companies. In addition, we investigate the overnight risk induced by the inefficient hedging behaviors of issuing entities under the hedge guideline proposed by the KRX. The overnight risk is quantified by the VaR (Value at Risk) methodology for 6 major individual assets in Korean stock markets. These 6 individual companies are commonly used when structuring ELS and have representative nature in the country’s structured product markets. According to the results, the levels of VaR for those assets are not significantly large, but they can easily increase as the sales volume increases. To reduce the potential overnight risk for issuing entities, therefore, the regulation on structuring (deltas) is necessary. Nevertheless, some may raise a concern about our proposal’s potential risk by claiming that more restriction on the deltas of structured products may hamper the active growth of the structured product markets. However, we maintain that the markets can grow even better, once the structured products are well secured with varying maturity dates.

한국어

본 연구는 주가연계증권, 주가연계예금을 포함하는 구조화 금융상품의 투자자 보호를 위하여, 구조화(structuring)에 대한 가이드라인을 제시하는 것을 목적으로 한다. 최근 주가연계증권의 헤지과정에서 발생한 비정상적인 거래행위에 대한 금융분쟁이 지속되고 있으며, 거래소와 금융당국은 투자자 보호를 위하여 구조화상품의 “헤지 가이드라인”을 발표하여 실행하고 있다. 규제 안은 중간평가일 또는 만기일에 헤지 물량을 분산하는 것을 장려함으로써 기초자산 가격이 왜곡되는 것을 막고자 하였다. 그러나 분쟁의 근본적인 이유는 효율적인 헤지를 수행할 수 없었던 구조화상품의 복잡한 구조에 있다. 본고에서는 최소가격변동폭(tick size)을 고려한 구조화상품의 최대 델타와 상품의 판매량을 고려하여 이론적으로 발생 가능한 최대헤지매도물량을 계산함으로써 구조화에 대한 가이드라인을 제시하였다. 판매량과 연동된 금융상품의 총 델타를 규제하는 것이 관련시장을 위축시킬 수 있다고 오인할 수 있으나, 만기일이 상이하도록 발행을 분산한다면, 본고에서 제안하는 구조화 가이드라인 하에서도 충분히 건전한 성장을 이룰 수 있을 것이다.