Securities companies startled by Shinhan Investment’s 130 billion won operating loss
“We are different” … Busy checking
“Concerns of industry slowdown due to stop of seeding… Possibility of ETF market contraction”,
Yeouido securities district. Photo=Reporter Shin Minkyung, ‘Shinhan Investment Securities, which has emphasized a principle of “we won’t cause incidents” by being the first in the securities industry to introduce the ‘management responsibility system’, recently incurred an unusual ‘130 billion won operational loss’. The Financial Supervisory Service has initiated an on-site investigation of Shinhan Investment Securities. Securities companies are hastening internal inspections even before additional instructions from financial authorities, embarking on ‘reform efforts’. Concerns are rising that a ‘Shinhan incident’ may inevitably lead to a contraction in the Exchange-Traded Fund (ETF) market.’,
, ‘According to industry sources on the 15th, major securities firms have begun internal inspections of departments related to ETF liquidity providers (LP). Considering that Shinhan Investment Securities incurred losses by deviating from its ETF LP business objectives through futures trading, other companies have also launched investigations into relevant departments.’,
,
, ‘For instance, the settlement and risk management department of Mirae Asset Securities completed an internal inspection over the weekend and reported to senior management the next day. A Mirae Asset Securities official stated, “To perform the role of an LP, one typically goes through these two departments, so we verified how position limits are managed when conducting tasks beyond LP duties.” The official added, “Given that a major incident occurred in a neighboring company, we swiftly conducted a review. Currently, it is confirmed that there are no significant problems in the computer system.” Other companies such as Hana Securities and NH Investment & Securities have also completed inspections of relevant departments.’,
,
, “This incident stemmed from a significant ETF LP operating loss incurred by Shinhan Investment Securities following ‘Black Monday’. On the 11th, Shinhan Investment Securities announced that it discovered losses estimated at 130 billion won due to futures trading transactions unrelated to its ETF LP business objectives. This amount represents more than 2% of the consolidated equity as of the first half of this year (5.5257 trillion won) and over 60% of the first half net profit (2.071 billion won).”,
,
, ‘The losses occurred between August 2 and October 10. In the industry, it is speculated that a Shinhan Investment Securities LP official incurred substantial losses in futures trading due to a severe domestic stock market plunge in early August following concerns of a global economic downturn originating from the United States, and attempted to conceal this by engaging in false swap transactions.’,
,
, ‘LPs are responsible for providing tight bid and ask prices for ETF trades to facilitate smooth order execution. During ETF transactions, they typically buy and sell index futures of relevant ETFs to hedge against risks.’,
, ‘It is understood that the head and a manager of the Corporate Futures & Options Department were placed on standby within the human resources department at the peak of this incident. It is expected that disciplinary measures will be determined through the Human Resources Committee around the time when Financial Supervisory Service on-site inspection concludes.’,
,
, “The atmosphere surrounding the entire Shinhan Financials group, including Shinhan Investment Securities, in light of this incident is gloomy. This is because shortly after resolving the 2019 redemption crisis stemming from the ‘Lime Fund Fraud’ case, where Shinhan sold the most at 324.8 billion won among securities firms and faced controversy, the group now faces a major loss incident. Efforts made for internal control reforms have now been overshadowed. Shinhan Bank was the first in the financial industry to submit a ‘management responsibility system’ under the ‘Financial Penal Act for Major Disasters’, and Shinhan Investment Securities introduced this system as the first securities firm in March.”,
,
, ‘With Shinhan Investment Securities, which had been at the forefront of proactively tightening internal control measures, experiencing another incident, the securities district in Yeouido cannot hide their bewilderment. Securities firms, who quickly convened department meetings and began system checks, actively explained, “Even if the confirmation process is delayed, it can proceed the following day so that any issues can be verified shortly after the incident.” The Financial Supervisory Service also announced that it will separately gather reports on the status of securities firms’ system checks and similar cases in light of this incident.’,
,
, ‘A securities industry official commented, “Since Shinhan Asset Management’s ETF had been performing exceptionally well since last year, a corporate-wide approach of ‘cooperating among group companies’ had emerged.” Therefore, it is evaluated that the incident, which can be interpreted as resulting from the increased authority of LPs and the occurrence of accidents, cannot be simply dismissed as ‘individual misconduct’. The official further stated, “Efforts must be made to properly strengthen the internal control related computer systems.”‘,
,
, ‘Criticism has also been raised regarding the management responsibility system. A person in academia mentioned, “Although Shinhan securities were the first to establish a management responsibility system among securities firms, there is a high possibility that it is merely ‘for show’.” They pointed out that this could be a typical case of internal control failure.’,
, ‘There are concerns within the industry that the incident may lead to a contraction in the ETF market. Shinhan Investment Securities has decided to halt ETF seeding (initial capital investment) and bid provision while undergoing Financial Supervisory Service investigations.’,
,
, ‘The industry’s concern lies in the fact that the consequences of Shinhan Investment Securities’ lack of LP role may not end there. As securities firms proactively engage in internal inspections either on their own or upon instructions from the Financial Supervisory Service, there is a high possibility that they will stop seeding ETFs and focus on reforming themselves. In such circumstances, asset managers who usually receive seeding and begin operating ETFs from the outset will have no choice but to postpone planned ETF release schedules. Even the Value-Up ETF scheduled for joint release on November 4 is not exempt from this.’,
,
, ‘An industry official expressed concerns, stating, “Securities firms playing the role of LP are essential for ETF launches,” and worried that “given the situation where even Financial Services Commission Chairman Kim Byung-hwan has ordered an investigation, securities firms are unlikely to aggressively engage in seeding.”‘,
,
,