What is an ELS?

ELS stands for Equity-Linked Securities.

It is a derivative-linked financial product designed to generate returns based on the performance of underlying stocks or equity indices.

The concept of being linked to an underlying asset may sound complex at first.

Put simply, predefined price ranges are set. If the underlying asset performs within those expectations, the product pays out the contracted coupon, with the potential for early redemption before maturity.

Current Status of the Hang Seng China Enterprises Index (HSCEI) ELS Crisis

This is currently one of the most critical developments in the financial markets.

Let's examine the details.

Hang Seng China Enterprises Index (HSCEI)

The core issue behind the HSCEI crisis is immediately clear when reviewing the three-year index chart.

Here lies the problem: positions entered in late 2020 and early 2021 have reached their final early-redemption window alongside severe knock-in barrier breaches.

As shown in the chart above, the HSCEI traded between 11,000p and 12,600p in 2021, roughly three years ago. Today, it trades near the 6,200p level.

With the Hong Kong market cut in half, investors holding these ELS products face massive projected losses.

Approximately 6.9909 trillion KRW worth of ELS products mature early next year, with 3.5781 trillion KRW already breaching knock-in barriers.

How can these losses be mitigated?

The financial sector estimates that the HSCEI must recover above 8,000p to prevent principal loss.

This is an overview of the HSCEI ELS situation.

Many mistakenly consider these instruments low-risk, but indexing underlying assets does not eliminate risk.

High yields never come without risk. The only path to reduced downside is a substantial index recovery before maturity.