120 Companies to Sue 13 Banks Over KIKO Option

A total of 120 companies suffering from KIKO terms have formed a joint body to initiate collective legal action against banks. KIKO, which stands for knock-in, knock-out option, is a financial derivative.

The body yesterday announced that it will sue 13 banks including Citi, SC First, Shinhan and Korea Exchange and seek a court order nullifying the KIKO agreement. Prior to the announcement, the plaintiffs commenced civil action with the Seoul Central District Court, seeking a court injunction to put the KIKO agreement on hold.

The representatives compared themselves to a naive country guy cheated by the village leader, alluding to their ignorance of derivatives and banks’ greed to profit from their ignorance. The following is a story told by the body about how banks got them to go for the KIKO option.

A village leader tells an innocent young man eager to get married, ‘Hey, I have a Rolex (i.e. KIKO). If you buy it, girls will love you,’” the body said.

Thinking it unwise to disappoint the village leader and a good idea to get married, the young man decides to have a look. But the watch has no straps and the man cannot show it in front of ladies. A watch without straps is like the KIKO product, which inflicts a huge loss when the exchange rate goes below a certain level.

The leader still insists that a Rolex is a Rolex (namely that risks from currency fluctuations can be avoided as long as the rate remains within a certain range), and that he give a Rolex to the man.

Then the leader proposes another term that if the village had a tall clock tower (i.e. hike in exchange rate) in the middle of the village and the need for a wristwatch dwindled, the young man give one Rolex per additional 10 meters of the increase in tower height.

The young man believes there is no possibility of a rural community building a tall clock tower. In addition, another leader close to the county governor says, “The county has no plan whatsoever to set up a tower in your village.” In other words, the banks misrepresented the risks from the sudden hike in the exchange rate to the companies with little knowledge about currency trading.

Contrary to initial expectations, a tower is set up and its height rises day after day, bankrupting the innocent young man and his dream of getting married without ever showing it off to ladies.

rews@donga.com