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Won depreciation claim rejected in kiko conflict (李幸揆(イ・ヘンギュ)弁護士)

2009.05.21

『Asia law』2009年5月号の「Won depreciation claim rejected in kiko conflict」の記事に、法務法人地平志誠の李幸揆（イ・ヘンギュ）弁護士のインタビューが掲載されました。

[原文リンク]

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	<li><a href="http://www.asialaw.com/Article/2202778/Channel/16713/Won-depreciation-claim-rejected-in-kiko-conflict.html" target="_blank">Won depreciation claim rejected in kiko conflict </a> 
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[全文引用] 
 
By Candice Mak 
 
The Seoul Central District Court's latest kiko (knock-in knock-out) case ruling has shown that it will not accept a currency derivatives contract should be terminated because of a sharp depreciation of the won. 
 
But the court has also stated that the banks should have explained fully the risk of the kiko product to the customers, says Jisung-Horizon Law partner Haeng-Gyu Lee. It has also stated that the banks cannot ask the customers to perform the obligation under kiko contracts if the exchange rate is more than 130% of the exchange at the time of the kiko contract execution. 
 
The release issued by the court on April 24 fails to recognise one of the two principal complaints lodged by companies seeking a suspension of their kiko contracts: that the won's plummet was sudden and unexpected. The other argument is that banks were negligent in fully explaining the risks attached to the options contracts. 
 
Lee's firm is representing a bank against the first type of claim: "We must challenge the customer's argument that the kiko contract may be terminated due to the material change of circumstances." 
 
He said that even though some judges had ruled in the claimant's favour based on a principle of changed circumstances, courts had also recently rejected a suit based on this complaint and refers to the statement made by the court last week. "This may be a standard for future kiko disputes." 
 
Kikos are a type of currency options contract that "knock in" if exchange rate conditions are triggered. A "knock out" occurs when an exchange level is met either before or after the "knock in" event occurs. This structure allows an option owner to profit by selling a certain amount of foreign currency to the structurer at rates that are higher than market value. 
 
The range of amounts that an option owner earns with a kiko is narrower than separate knock-in and knock-out options, so this combination contract is cheaper because of reduced counterparty risk. 
 
Many domestic companies purchased these hedging options before the financial crisis to protect themselves against fluctuating foreign exchange rates - a typical worry for exporters. The won appeared stable and appreciating until it fell 26% in the latter half of last year. Now, companies that bought kikos are accusing the selling banks of negligence in disclosing the risk exposure of these instruments. 
 
"The banks deliberately failed to disclose the option pricing," says Ahnse Law Offices attorney Seyon Park. "With a normal contract, as these were, it should be fully disclosed or the pricing should be close to equal." 
 
The battle between the companies and banks is well-documented by local media and recently, the International Swaps and Derivatives Association (ISDA) denounced decisions made by the Seoul Central District Court to grant preliminary injunctions on certain companies' kikos. 
 
On April 24, the court granted injunctions to three small companies to have their kiko contracts suspended until final verdicts are made on their cases. ISDA has criticised this, saying that it sets a dangerous precedent for the over-the-counter derivatives market and dampens investor confidence. 
 
This temporary suspension was the latest decision in a string of similar lawsuits. 
 
Despite the most recent ruling, the court had previously rejected some claimant cases. Seven companies had already attempted to have their kiko contracts suspended but the court found their banks had fulfilled their fiduciary duty of disclosure and protection. 
 
The decisions are based on an independent review of each company's case, using conversation recordings taken when the actual transaction was made and assessing involved parties' statements. 
 
"The court basically doesn't see it as much as of a scam or fraud enough to nullify or terminate the whole contract," said Park. 
 
"Our challenge is that if the court will only rule on grounds for negligence, we must put as much fault on the banks to get as much compensation as possible," he said.

お知らせ炭素市場と新再生エネルギー実務セミナー 2009.06.10

お知らせ『ロシアエネルギー資源法制度セミナー』開催終了 2009.04.20

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李幸揆
(イ・ヘンギュ)
+82-2-6200-1744 hglee@jipyong.com

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