Financial Supervisory Service’s MBTI for Work: Key Issues – Hong Kong ELS, Short Selling, Taeyoung, Real Estate PF Crisis

Lee Bok-hyun, Commissioner of the Financial Supervisory Service. Photo Yonhap News “You know MBTI, right? This year, the Financial Supervisory Service’s MBTI for work is ESTP.”

These are the words of a senior official at the Financial Supervisory Service. It’s a joke borrowed from the personality type test MBTI, but if you look at the letters of the alphabet one by one, it’s quite a meaningful story. This is because each of them represents the issues that the Financial Supervisory Service needs to look at most urgently this year.

Maturity amount of 10 trillion in the first half of this year… Hong Kong H Index ELS crisis is urgent

Among ESTPs, E refers to the Hong Kong H Index Stock-Linked Securities (ELS) issue. This is because the Hong Kong H Index ELS is expected to suffer losses worth trillions in the first half of this year due to the plunge in the underlying asset, the Hong Kong H Index.

Hong Kong’s H index exceeded the 12,000 level in early 2021, but fell to the 5,300 level due to the conflict between the US and China and the aftermath of China’s economic slump. At least, it fell to the early 5000s at the end of last month, but rebounded slightly as the Chinese authorities introduced large-scale economic and stock market stimulus measures.

According to the Financial Supervisory Service, as of November last year, the total sales balance of Hong Kong H-index ELS amounted to 19.3 trillion won. Of these, 79.8%, or 15.4 trillion won, will mature this year. In the first half alone, more than half, or 10.2 trillion won, of maturities are concentrated, including 3.9 trillion won in the first quarter (January to March) and 6.3 trillion won in the second quarter (April to June). This is why investors are concerned about large-scale losses.

The Financial Supervisory Service is conducting a survey of banks and securities companies regarding the Hong Kong H Index ELS. This is a procedure to determine whether there were any problems in the sales process, such as the bank not fulfilling its obligation to explain, while selling ELS, a high-risk product. Some have already testified that bank employees prepared the investment propensity statement and signatures required to sign up for high-risk products. Based on this, the Financial Supervisory Service plans to prepare a dispute compensation plan within this month to distribute losses between financial companies and consumers.

Watch out for illegal short selling in the capital market… After cooperating with foreign authorities

The official explains that S stands for short selling. The Financial Supervisory Service has been conducting an intensive investigation into illegal short selling targeting global investment banks (IBs) since last year. During a thorough investigation of about 10 IBs, a total of 100 billion won was found in at least four places.
Large-scale illegal short selling was discovered.

The Financial Supervisory Service plans to announce the results of an additional investigation into illegal short selling as early as this month. During this month, a working-level team, including the head of the short selling special investigation team, will visit Hong Kong to discuss cooperation with local authorities.

According to the current Capital Markets Act, even transactions made overseas, such as Hong Kong or Singapore, can be punished by applying the Capital Markets Act if the effects are domestic. However, the legal profession explains that in reality, close cooperation with the local community is essential for actual punishment to be carried out.

Discussions regarding the computerization of short selling, which began at the end of last year, are also expected to accelerate. An official from the Financial Supervisory Service said, “We have almost completed the step-by-step outline for the computerization of short selling,” and added, “We plan to collect opinions from all walks of life on the procedures and costs required for each step.”

Taeyoung’s workout remains at a critical point in April

T and P are subsequent issues. This is because T is the first letter of Taeyoung and P is the first letter of Project Financing (PF).

Taeyoung Construction, ranked 16th in the contract rankings this year, introduced workouts (corporate structure improvement work) and is considered the ‘first large-scale construction company workout in 10 years’ since Ssangyong Construction in 2013. The reason why large construction company workouts are meaningful is because there are many stakeholders and the impact is large.

Taeyoung Construction has 140 ongoing construction projects and 122 PF business sites that have signed guarantees. The number of partner companies was counted at 581. The size of the guarantee, initially known to be around 9 trillion won, was found to amount to 20.4 trillion won through additional due diligence. There are over 600 creditors, including bond finance companies and lenders who lent money to each PF business.

A construction company workout is characterized by the fact that not only the company but also related PF workplaces undergo procedures similar to the workout. By the end of this month, Anjin Accounting Corporation will conduct an on-site inspection of 60 PF business sites related to Taeyoung Construction, and a separate lender group for each PF business will decide whether to proceed with the project and inject new funds based on the results of the inspection. If the lender determines that business feasibility is low, or if serious insolvency is discovered, the business may hand over major assets to auction or public auction and close down.

These PF workplace treatment plans are included in Taeyoung Construction’s corporate improvement plan and are scheduled to be resolved at the second creditors’ council in April. The workout can continue only if the plan receives the approval of more than 75% of creditors.

However, if the number of creditors who withdraw due to disagreement with the contents exceeds 25% during this process, Taeyoung Construction or individual PF businesses may be placed under court receivership, resulting in an unprecedented large-scale debt feast (liquidation).

The real estate project financing (PF) crisis must also be overcome.

In addition to Taeyoung Construction, real estate PF of financial companies and construction companies is also a major issue. The Financial Supervisory Service plans to actively pursue the resolution of PF insolvencies this year. This is to prevent real estate PF risks from expanding to the entire financial market.

The Financial Supervisory Service understands that there are no construction companies or financial companies that have liquidity problems that could cause a ‘Taeyoung Construction-level’ shock in the first half of the year.

The Financial Supervisory Service’s goal is to complete the liquidation of insolvent businesses and the restructuring of businesses at risk of insolvency within the year. The explanation is that the interest rate, which had been soaring for a while, has stabilized since the end of last year, making it the right time to normalize PF insolvency through ‘market measures’. Regarding this, Director Lee also threatened, saying, “We will be willing to expel companies from the market if they evade their natural responsibilities as financial institutions, such as delaying the recognition of legitimate losses.”

“If even one of the ESTPs is missing, crisis is inevitable.”

Image created through ChatGPT The general consensus within and outside the financial authorities is that none of these four major issues can be left out of the priority list.

H Index ELS has a very large number of investors, and the proportion of elderly people who invested for the purpose of raising retirement funds is also high. The crackdown on illegal short selling is a matter of trust in the domestic capital market. The resumption of short selling trading, which was suddenly halted in November last year, also depends on crackdown on short selling and improvement of the system.

The Taeyoung Construction workout and real estate PF are issues that could easily spread the crisis to the entire domestic financial market. An official from the Financial Supervisory Service said, “ESTPs are said to be characterized by thinking realistically, seeking compromises, and being excellent at solving problems,” and added, “Such knowledge will be especially needed when the Financial Supervisory Service deals with major issues this year.”

Reporter Seon Han-gyeol [email protected]

2024-02-11 07:41:46
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