JPM, SocGen Earned $6.8mn on Money-Losing DLFs Sold in Korea

FSS data shows that JP Morgan Chase and Société Générale earned nearly $6.8mn from the high-risk derivatives products sold through KEB Hana and Woori Bank.

FSS (Financial Supervisory Service) data has revealed that JP Morgan Chase and Société Générale earned a combined commission income of nearly KRW 8 billion (USD 6.8 million) from designing high-risk derivatives products sold mostly to South Korean investors, reports the Korea Herald.

DLFs (derivatives-linked funds) have recently been in the spotlight for major losses they caused investors after interest rates plummeted. Following complaints from investors, the FSS decided in August to conduct emergency inspections at banks that sold DLF products, specifically KEB Hana and Woori Bank.

> ALSO READ: Woori, KEB Hana Likely to Compensate Investors in Risky Products (23 Sep 2019)

The FSS data, acquired and released by lawmaker Je Youn-kyung, reportedly shows that JP Morgan Chase received a commission income of KRW 1.7 billion from Woori Bank for designing DLFs tied to German government bond yields.

Société Générale received commissions of KRW 2.3 billion from Woori, as well as KRW 3.7 billion KEB Hana Bank, the latter being for developing structured products tracking constant maturity swap rates of the US dollar and British pound.

South Korean brokerages and asset managers also earned separate commissions from Woori and KEB Hana, the FSS data reveals.

IBK Investment & Securities received KRW 283 million; NH Investment & Securities received KRW 354 million; Hana Financial Investment received KRW 335 million; and another ten local asset managers received a combined KRW 551.2 million.

According to the lawmaker who released the data, the JP Morgan and Société Générale proposed the creation of the derivatives products to local brokerages, who then signed a hedging deal with the two investment banks to reduce their risks in exchange for guaranteed commission for JP Morgan and Société Générale.

The products were then sold via commercial banks Woori and KEB Hana to their clients.

> ALSO READ: KEB Hana Under Added Scrutiny for Document Deletion (17 Oct 2019)

The release of the data follows FSS findings that of 750 suspected cases of “unethical” sales of DLFs tied to overseas interest rates, which the banks continued to sell despite an increasing likelihood of loss.

The inspection revealed that KEB Hana and Woori sold DLFs worth KRW 795 billion to over 3,000 investors – where losses exceeded 60 percent of their investment.

The FSS said all financial institutions involved in the case ignored their duty to assess risks and alert their clients of potential risks, and warned that the heads of the banks that engaged in mis-selling and caused investor losses may be punished.

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