ELS 분쟁의 현황과 법적 쟁점 = Current Status and Legal Issues of the Disputes over Equity-Linked Securities (ELS)

다국어 초록 (Multilingual Abstract)

There have been civil and criminal disputes over equity-linked securities (ELS) in Korea since 2009. ELS have the characteristics of derivatives-linked securities under the Financial Investment Services and Capital Markets Act and the judgment of the courts, prosecutor`s office, and supervisory authorities may affect legality of securities firms` hedging methods underlying ELS products, which may in turn affect the legal validity of the ELS products and other similarly structured financial investment products which are popular financial investment products in Korea. In criminal cases, the issue raised is whether Article 176 of the Financial Investment Services and Capital Markets Act (Prohibition on Market Price Manipulation, etc.) or Article 188-4 of and the former Securities and Exchange Act (Prohibition on Unfair Trading including Market Price Manipulation) applies, and in civil cases, the issue raised is whether Article 150 (Act against Trust and Good Faith as to Condition) of the Civil Code applies. Since the amount hedged itself may be viewed as a factor affecting supply and demand and transactions of any size may fix or stabilize the prices of securities under Article 176, Section 3 of the Financial Investment Services and Capital Markets Act, if delta hedging is used in a consistent and predictable manner, Article 176, Section 3 is not likely to apply. As for Article 176, Section 4 of the Financial Investment Services and Capital Markets Act, it is also questionable whether this provision would apply to unlisted ELS products as a matter of statutory interpretation. Article 188-4 of the former Securities and Exchange Act is also not likely to apply for similar reasons. As for Article 150, Section 1 of the Civil Code, trial courts have rendered split decisions, with the pending case at the appellate court attracting much attention. It is impossible to think of ELS products without the delta hedging method from the basic structural point of view. If delta hedging is simply considered as a method of hedging risk taken under ELS issuers` sole responsibility and if any legal determination made is only based on the results of such hedging, then the legal validity of ELS and other similar financial investment products may be seriously questioned and they would lose their legal justification. What is now required is a reasonable determination by the courts, prosecutor`s office and supervisory authorities regarding the relationship between delta hedging and ELS products and validity of specific hedging transactions, as distinguished from abusive hedging transactions.