The nation's top court on Thursday ruled that a controversial currency derivative is not unfair, siding with local banks in a legal battle against companies who suffered losses when the local currency slid against the U.S. dollar years ago.
The so-called Knock-in, Knock-out (KIKO) currency derivatives were sold by about a dozen local banks to a range of small and medium local exporters who used the products to hedge against volatile currency swings.
But following the onset of the global credit crunch in 2008, the South Korean won tumbled 25.7 percent to the U.S. dollar in that year alone, leading to heavy losses for KIKO buyers.
South Korean companies soon filed separate lawsuits against the banks, including Standard Chartered, Citibank and HSBC, seeking to nullify the KIKO contracts. The firms complained that the contacts exposed them to unlimited downside risks and the banks did not fully brief them of the potential risks.
In a ruling that could influence the outcome of similar lawsuits, the Supreme Court said that KIKO contracts are not deemed as unfair due to changed circumstances.
"It is difficult to judge (KIKO) as unfair just because it is structured to incur losses to one side and bring profits to the other side amid changing market conditions," the court said in a ruling.
The court added that KIKO is a product designed to partially hedge risks and the banks' profits from KIKO were not excessive compared to the interest earned on other financial transactions.
With other similar cases pending in the court, industry watchers expect that the ruling on the contract could affect the remaining cases. In 2008, over 100 small-sized companies filed petitions against banks that sold them similar options after suffering heavy losses.