Hanwha Investment & Securities Co., the brokerage unit of South Korean conglomerate Hanwha Group, reported the largest operating loss of nearly 200 billion won ($179 million) among local securities firms in the January-June period after it undertook management risk of equity-linked securities (ELS) issued by another brokerage firm, according to multiple industry sources on Thursday.

Sources noted that Hanwha Investment & Securities has inconsiderately expanded its own ELS management business to obtain excess profit although it is short of expertise in derivatives hedging.

According to the Financial Supervisory Service (FSS) and Korea Securities Depository on Thursday, the ELS balance at Hanwha Investment & Securities reached 1.07 trillion won as of Wednesday. Of the total, 60 percent, or 610 billion won, is self-managed, which is higher than the local brokerage industry’s average of 53 percent. Separately, a recent on-site inspection by the FSS has confirmed that Hanwha Investment & Securities has been managing 1 trillion won worth of ELS products issued by another brokerage firm in the form of back-to-back trade.

Back-to-back contract is a transaction in which gains and losses as well as risk from hedge management are transferred to a contracted financial institution with commission of about 0.5 percent. An unnamed FSS official said local brokerage firms generally assign back-to-back transactions of derivatives products to foreign investment banks with much experience and knowhow. Hanwha Investment & Securities with less experience in ELS hedging, however, went forward and assumed the risk of another brokerage firm and saw losses pile up from ELS hedging, the official added.

According to a semi-annual report submitted by Hanwha Investment & Securities to the FSS on August 12, the company reported 202.5 billion won worth of losses from managing derivatives during the January-June period. Its total operating loss amounted to 191.4 billion won during the period.

Amid mounting losses from ELS-related products at local securities companies in the first half of 2016, the FSS has enhanced its monitoring, expanding its on-site inspection into overall ELS management by brokerage houses including that of Mirae Asset Daewoo Securities Co.

In a meeting with executives from eight brokerage firms on Thursday in Yeouido, western Seoul, FSS Governor Zhin Woong-seob urged them to focus more on controlling risk stemming from ELS investment.

By Choi Jae-won

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