An investigation into derivatives trading with Korean government-linked entities has effectively closed the multi-billion dollar business. "This market is dead right now," said a derivatives head at a European house. The probe centers on four of the major players in the country--Barclays Capital, BNP Paribas, Deutsche Bank and JPMorgan--who allegedly failed to fully disclose risks surrounding fx derivatives sold to the entities, which may have led to marked-to-market losses, according to media reports. Such state companies as Korea Highway Corporation, Korea Rail Network Authority, and Korea Land Corporation have been named in press reports as end users in the case.
The four dealers are currently being investigated by the Financial Supervisory Service. Officials at the FSS' banking supervisory department II, in charge of the investigation, said an announcement will be made before the end of the month, declining further comment.
On the back of the scandal, market officials noted that government-linked entities, which typically convert overseas debt issuances back into won via currency swaps, are shying away from such trades until the scandal blows over. Derivative marketers are hopeful, however, such end users could return before winter, once the investigation is cleared up.
But the recovery time for the four firms is less clear and they may see their reputations and market share for such trades diminished. "I imagine their reputations will suffer significantly if the sanctions are severe," said a derivatives head at a domestic bank, adding, "However, minor warnings are not uncommon and happen from time to time." Market participants said the regulators could warn, suspend or fine the firms.
Maeve Gallagher, spokeswoman at Barclays, and Christine Chan, spokeswoman at BNP, did not return messages. Jason Collins, spokesman at Deutsche Bank and Prakash Krishnan, spokesman at JPMorgan, declined comment.
