By Kim Yeon-hee
SEOUL (Reuters) - A South Korean high court has rejected a chemical company's suit to suspend currency options contracts sold by three banks, including Citibank, in a ruling that could influence the outcome of several similar lawsuits.
The Seoul High Court said on Monday it had upheld a lower court verdict against the move by KPX Fine Chemical Co. Ltd. to put on hold knock-in knock-out (KIKO) currency-hedging contracts with Shinhan Bank, Citibank
The KIKO contracts became an issue in the latter half of last year when the won fell around 30 percent against the dollar in the wake of the global financial crisis, to which South Korea's economy was seen as particularly vulnerable.
The contracts allow companies to sell dollars with 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 large potential losses.
Companies have argued that the banks failed to warn them clearly of the risks.
"There are some aspects in the structure that look quite disadvantageous to the buyer who had intended to hedge currency risks ... but it is difficult to view the contacts as lacking fairness," the High Court said in its ruling.
Regulatory authorities estimate banks had a combined $1.9 billion worth of KIKO deals with about 130 companies as of the end of May.
Shinhan, a unit of the country's top financial services company Shinhan Financial Group, welcomed the decision.
"We are expecting the high court ruling to have a positive influence on other similar cases in the pipeline," an official overseeing the KIKO contracts at Shinhan told Reuters.
SC First Bank spokesman Hee Sun Joo said: "Based on this decision, we hope the issue may be resolved."
In some other cases, lower courts have ruled in favor of companies wanting to suspend the currency contracts to prevent any further losses. These are all being appealed by the banks.
An official at KPX Fine Chemical said its exposure to KIKO deals had more than doubled to $300 million from the original contract due to the won's decline.
"We have already started carrying out the payment to banks," he said, asking not to be identified because the company had not yet received a statement on the court ruling.
"We are working on another lawsuit to get the money back (from the three banks)."
Citibank declined immediate comment.
(Reporting by Kim Yeon-hee; Editing by Jonathan Thatcher)
