Korean crunch: how HSCEI fall hammered exotics desks

The 40% fall in the HSCEI index in September left dealers scrambling to hedge their Korean autocallable and variance swap positions, leading to losses of more than $300 million

Since the start of 2015 a number of dealers have been predicting that a big decline in one of the indexes linked to Korean equity-linked securities (ELSs) would cause heavy losses for securities firms that had exponentially expanded their presence in the market – taking market share from international firms and even bringing their hedging in-house.

That moment finally came in early September when the Hang Seng China Enterprises Index (HSCEI), which is composed of H-shares listed on the Hong