Government-linked agencies in Korea have been unwinding structured derivative positions because of what they say is regulatory pressure. The move appears to be the final nail in the coffin of a once multi-million dollar market that has been roiled by losses and regulatory scrutiny (DW, 7/8). "As long as the government has this mindset, I won't use any derivatives," said a finance officer at one of the agencies that has been unwinding the trades.
Corporate officials at the agencies said regulators have been pressuring them indirectly via foreign counterparties to unwind the trades.
Earlier this summer, regulators tussled with Barclays Capital, BNP Paribas, and Deutsche Bank for allegedly failing to fully disclose risks surrounding exotic derivative positions to the state-linked companies. Korea Highway Corporation, Korea Rail Network Authority, and Korea Land Corporation were named in the local media as end users.
"My view is that such exotic transactions should be discouraged," Lee Kay Seong, head of the examination team which handled the initial investigation into the transactions at the Financial Supervisory Service in Seoul, told DW. Lee, however, disputed that the FSS put any pressure on foreign banks to unwind such transactions. "The early termination of the contracts were business decisions between the two parties," he added.
Insiders said the scandal has effectively shut the tap on the multi-million dollar market for state-linked derivative transactions. Market officials at international houses noted that in the meantime, marketers have been shifting their focus toward the corporate side of the business, which has started to revive in Korea on the back of anticipated additional interest rate increases.
Market officials said the FSS was concerned about the suitability of such transactions and the lack of adequate disclosures for such positions. The regulator's apparent belief the arrangers picked up too large of profits on the deals also seems to have led it to infer dealers should unwind the transactions.
