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Seoul court injunction over FX option a concern – ISDA

Posted on: April 2, 2009


Reuters – Thursday, April 2

SEOUL, April 1 – A Seoul district court’s injunctions suspending currency options contracts sold by banks have set a dangerous precedent and may undermine investor confidence in the country, a global trade group said on Wednesday.

The Seoul Central District Court, a lower court, has heard 10 cases filed by small-sized companies after they suffered big losses from knock-in knock-out currency options contracts and filed suits against the banks that had sold the products.

The court granted companies a preliminary injunction in four cases, allowing them to temporarily suspend the KIKO contracts pending the final verdict of the cases, citing “changed circumstances”.

“The… rulings could severely inhibit derivatives activity in Korea and in turn risk upsetting financial stability if these decisions are upheld and banks made wary of entering into financial contracts,” said Keith Noyes, ISDA Regional Director, Asia Pacific, in a statement.

ISDA stands for the International Swaps and Derivatives Association .

The currency hedging derivatives were aimed at protecting small exporters from a sharp swing in foreign exchange rates.

But the court said in a recent verdict that the structure of the products were designed to cause companies indefinite losses when the won <KRW=> value decreased, and banks failed to clearly inform the buyers of the risks.

“The court has set dangerous precedents disrupting the fundamental right to enforceability of contracts in the country. This could expose the country to dampening international investor confidence and in turn increase risk,” ISDA added.

But a district court in Incheon, west of Seoul, rejected a similar suit to suspend a KIKO contract with HSBC <HSBA.L> <0005.HK> last month, saying the won’s rapid fall during the contract period did not constitute a factor to allow the currency option to be put on hold.

As of end-August, 471 small- and medium-sized enterprises were holding KIKO contracts worth $5.9 billion, from which they incurred 1.285 trillion won in losses, according to data from the regulatory Financial Supervisory Service.

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