The South Korean Financial Supervisor has issued a warning in a report published recently: around $850 million notional of autocalls are at the barrier level ! Those products are usually indexed on the worst of S&P500, Eurostoxx50, Kospi and Hang Seng China Enterprise Index (HSCEI) and exhibit a step down autocall feature, the last autocall trigger being at 50%-60% of initial level, which also corresponds to the final barrier level.
📈 Given the poor performance of HSCEI, that index is the driver of the performance and of the final payoff. At the end of Q3 2022, HSCEI was at or below the final barrier level.
Most of those products will mature in 2024. In other words, if HSCEI is up from here in 2024, investors may get their initial investments back + coupons. If HSCEI is down from there, investors will lose 50% or more of their initial investment.
📈 That means that circa $0.5 billion of retail investors money is at risk at those levels.
It also means that there is cumulated digital of $0.5 billion in the banks’s books! or… a short skew position on HSCEI and short forward. As the structures became short vega (for the dealers), the 2-year volatility has reset to higher levels. If HSCEI stays there, one can expect skew to be distorted, and substantial effects on dividends and repo as the delta increases. As time to maturity decreases, we may see some impressive gamma swings around the barrier level.
🐰 For everyone- investors and traders- let’s hope that the HSCEI Index will recover by 2024!
