Newsletter | December 2013
	KIKO products are not unfair products
	Recently, the Supreme Court rendered an en banc decision on the KIKO case ending a seemingly endless dispute over the last 5 years.
	The Supreme Court recognized the fairness and the suitability for currency hedging of structured currency derivative products in various forms, also called as KIKO products.  In particular, the Court ruled that so far as the profits made by financial institutions are inherent in derivative products and the margin is reasonable, the products cannot be deemed as unfair.  In addition, the Court ruled that, just because the value of the purchased option by a financial institution is bigger than the value of the purchased option by a customer on account of the profits made by the financial institution, the financial institutions is not obligated to notify the customer of the value of each option or its own profit.
	The Supreme Court also provided a standard on the suitability principle and financial institution’s obligation to explain and disclose to the customer in OTC derivative transactions.  (i) A financial institution bears liability for damage compensation only if it proactively recommended a transaction which led to an excessive volume of risk in light of the purpose of the transaction and the customer’s assets, in violation of the suitability principle, unless the customer insisted on the execution of the transaction while being sufficiently aware of the transactional risks, in which case the customer bears the responsibility under the principle of caveat emptor.  (ii) While financial institutions must explain matters such as the structure, contents and risks associated with a product but not matters such as the financial-engineering structure and principle of the product, value of options, minus market value of KIKO products, profits of the banks, worst case scenario, early termination, etc.
	Most of the commercial banks in Korea were defendants in the KIKO case, who were represented by Kim & Chang.  We successfully defended their interest through testimonies of five expert witnesses, numerous court representations on the suitability principle and obligation to explain, as well as the financial engineering issues raised by the companies.  This Supreme Court ruling has put an end to a dispute on the fairness of various currency option products, including KIKO products, and has turned down the assertion of plaintiffs that banks are subject to a strict level of suitability principle and obligation to explain when treating OTC derivative products.
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