Local financial firms to conduct stress tests on derivatives

SEOUL, May 11 (Yonhap) -- South Korea's financial watchdog said Monday it will
require local financial firms to conduct stress tests on derivatives as part of
efforts to gauge possible losses from a market crisis.

A total of 50 financial firms, including banks and brokerage houses, will be
required to report the results of the stress tests of the derivative products
they are selling on a quarterly basis, according to the Financial Supervisory
Service (FSS). They should report the first outcome to the regulator by the end
of July, it added.
The tests aim to measure how robust a financial instrument is under the
worst-case market scenario.
"If potential losses are found to be unmanageable, the watchdog plans to advise
financial firms in question to readjust the weight of derivative sales in their
business portfolios," an official at the FSS said.
The move comes as global financial markets struggle to cope with the fallout
caused by Lehman Brothers Holdings' collapse last fall.
On the domestic front, many smaller South Korean firms have been suffering from
losses related to currency options known as "knock-in knock-out" contracts, or
KIKO, which have snowballed due a weak Korean won.
Local firms used KIKO contracts as a way to hedge currency risks under
expectations that the won's value would not fall sharply. But amid the global
credit crunch, the Korean currency tumbled 25.7 percent to the U.S. dollar last
year alone, incurring heavy losses for those companies and local banks.
sooyeon@yna.co.kr
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