BACKGROUND

Since the global financial crisis, the issuances of equity-linked securities (ELS) and derivatives-linked securities (DLS) have surged with the trend of low-interest rate and growing demand for customized investment.

With the growing popularity of ELS and DLS, there is need to strengthen investors protection accordingly. In particular, ELS and DLS are legally treated same as corporate bonds; therefore, investors remain vulnerable to the issuer’s credit risk.

Against this backdrop, the FSC came up with measures to strengthen investor protection and the soundness of ELS/DLS markets as follows:

KEY MEASURES

1. Monitoring system for the issuance and operations of ELS/DLS

The monitoring system will be established for more effective management and oversight of the issuance and operation of ELS/DLS. Hedged assets will be managed separately from client-owned assets. Securities houses will be required to establish separate electronic systems by issuers to manage hedged assets. The FSC will review ways to legally differentiate hedged assets from client-owned assets and provide effective protection for investors’ assets. The status of ELS/DLS issuances and operation should be reported to the FSS on a monthly basis.

2. Strengthened management of issuers’ credit risk

The FSC will discourage securities houses from excessively issuing short -term ELS/DLS with three-month or less maturities in order to prevent overheated competition in the markets. Based on the monitoring of market situation, the FSC will consider whether to directly limit the issuance of ELS/DLS to a certain ratio of issuers’ equity capital.

*Please read the attached file for details.