Court partially nullifies SC First's currency option contracts

SEOUL, Dec. 30 (Yonhap) -- A Seoul court Tuesday partially invalidated currency option contracts between SC First Bank Ltd. and two exporters, saying the lender failed to meet its obligation to protect clients from the bank's potentially huge losses.

The Seoul Central District Court said it "partially accepts DS LCD Co. and MonAmi
Co.'s application for provisional dispositions on their "knock-in knock-out
(KIKO)" deals with the South Korean unit of British Standard Chartered Bank.
KIKO contacts, popular among exporters, allow companies to sell dollars with a
fixed won-dollar rate if the won moves within a certain range. If the won falls
below the range, companies have to sell dollars below the market rate, leaving
them exposed to potentially large losses.
As the won's value against the dollar plunged in recent months, many local
businesses were hit by losses stemming from KIKO contracts. Last month, nearly
100 small-sized South Korean companies suffering big losses from currency hedging
derivatives filed a class action suit against local banks that sold them the
options.
"The lender has not properly fulfilled its duty to protect its client and the
contract has lost its base of rationality as volatility in the exchange rate has
rapidly increased," the court said.
Concerning the contract, the two companies were released from their obligations
as of November 3, when they filed the request with the court for cancellation of
the KIKO contract, the court ruled.
As of end-August, 471 small- and medium-sized enterprises were holding KIKO
contracts worth US$5.9 billion, from which they incurred 1.285 trillion won
($1.01 billion) in losses, according to data from the Financial Supervisory
Service.
odissy@yna.co.kr