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The outstanding balance in derivative-linked securities (DLS) issues in Korea shrank in the third quarter as massive losses in the exotic products backing overseas debt scared investors.

According to Korea Securities Depository on Monday, a total of 6.5 trillion won worth of DLS have been issued in the third quarter, down 24.8 percent from the previous three months period. DLS are a type of securitized financial product whose returns are determined by the performance of underlying assets such as interest rates and raw materials.

The overall drop in the issuance comes as high-risk derivative products sold by banks and brokerages have led to huge losses as they were tied to the performance of overseas bond yields. Returns have been dragged down after major central banks dramatically shifted from tightening to easing amid slowdown in the economies.

By issuance type, public offering of DLS totaled 2.06 trillion won, accounting for 31.7 percent of total issuance, followed by private offering with 4.4 trillion won (68.3 percent). Public offering increased 2.6 percent in the third quarter from the previous quarter while private offering dropped 33.1 percent.

By underlying asset type, a total 2.1 trillion won worth of DLS based on interest rates was issued in the July-September period, accounting for 32.5 percent of the total issuance, followed by hybrids 2.08 trillion won (32 percent), and credit-based DLS 1.3 trillion won (20.8 percent).

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Issuance by top five brokerages came to 3.88 trillion won, taking up 59.7 percent of total issuance during the period. Hana Financial Investment Co. was the largest issuer with 992.4 billion won.

Total repayment of DLS reached 7.9 trillion won in the third quarter, up 3.2 percent from the previous quarter. By type, early repayment was 4.01 trillion won, accounting for 50.8 percent of total redemption, maturity repayment 3.7 trillion won (46.7 percent), and moderate repayment 198.1 billion won (2.5 percent).

The issued balance of non-redeemed DLS reached 39.7 trillion won as of end of September, down 2.3 percent from the end of June.

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