A South Korean regulator is investigating whether financial institutions that sold derivatives products linked to Chinese stocks adequately explained the risk of losses to retail investors.

The Financial Supervisory Service is probing sales of equity-linked securities tied to the Hang Seng China Enterprises Index, the regulator said in a text message. Some 8.41 trillion won ($6.5 billion) of such products will mature in the first half of next year, the Korea Economic Daily reported earlier, citing unidentified people in industry.

The HSCEI — which tracks Chinese stocks listed in Hong Kong — has plunged more than 50% from a peak in February 2021 on China’s weak economic recovery, property crisis and geopolitical tensions with the US. That has fueled concerns over the potential related losses for investors in Korea, one of the world’s largest markets for structured notes.

China Rout Set to Roil $71 Billion Korea Market for Exotic Notes

The FSS has begun on-site inspection into Kookmin Bank, the largest seller of the so-called “autocallable” products, with 4.77 trillion won set to mature by the end of June, according to the Korea Economic Daily daily. Kookmin Bank confirmed that on-site inspection by the regulator has been ongoing since the start of last week. The probe will also review sales of other institutions, including Hana Bank, the FSS said.

ELS products offer bond-like coupons if the underlying equities or indexes maintain certain levels, but if they drop sharply, investors can lose much or all of their principal.

Although it is not easy to predict the size of principal losses that depend on maturity and structure, the Economic Daily estimated losses of 40-50% on structured notes maturing in the first half of next year if the HSCEI remains at its current level.

--With assistance from Daedo Kim.