Court annuls lenders` KIKO contracts, says banks did not explain risks

SEOUL, April 24 (Yonhap) -- A Seoul court on Friday invalidated currency option
contracts between four lenders and three small businesses, saying the banks
failed to fully explain potential losses from the deal to their clients.
The Seoul Central District Court approved petitions by KUT, a heavy machinery
parts maker, and two other small businesses to annul their "knock-in knock-out
(KIKO)" deals with Shinhan Bank, Citibank Korea, Hana Bank and Korea Exchange
Bank effective immediately.
KIKO contracts, popular among exporters, allow companies to sell dollars at 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 last year, many local businesses
were hit by unexpected losses stemming from KIKO contracts. Last year, nearly 100
small-sized companies filed petitions against the banks that sold them the
options after suffering heavy looses.
"Banks that sell the products are required to show a high standard of obligation
to protect customers. They are obliged to fully notify the clients on the
structure of the product and potentially embedded risks," the court said.
"Because the terms of KIKO contracts are complex, it is most likely that
companies, unless they have detailed knowledge, are not aware of the risks," it
said. "Some of the banks not only neglected their responsibilities to explain the
risks, but actively encouraged clients to enter into contract."
The court, however, rejected petitions by seven other small companies, saying the
banks had given full explanations of the contracts or that the firms had used the
deals to engage in financial speculation.
odissy@yna.co.kr
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