New rules and reforms to support Korean derivatives growth

The derivatives market in South Korea will continue to grow steadily thanks to new reforms and regulations taking place in the market.

By None

The derivatives market in South Korea will continue to grow steadily thanks to new reforms and regulations taking place in the market.

Currently South Korea’s derivatives market boasts the world’s greatest trading volume, with its annual trading reaching US$27 trillion in 2011, according to a study by research firm Celent titled, ‘Evolution of South Korea’s derivatives market: Factors for change’.

While the country’s listed derivatives trading volume, with 3.9 billion transactions annually, accounts for approximately 20% of the world total, this is in stark contrast to the nation’s OTC derivatives market, which accounts for just 0.2% of the world total.

To further expand the OTC market, the government plans to introduce a central counterparty (CCP) clearing house by end of 2012 under the Korean Exchange (KRX). This will be a major step to take the OTC derivatives market to a level on par with other markets around the world, cites the report. After the implementation of the CCP, the market is expected to offer increased security and transparency.

The country also decided to lift the ban on domestic hedge funds in late December 2011 and the industry expects that – due to the nature of hedge funds, which are free to invest in items including securities, derivatives, and real estate – greater liquidity will flow into the derivatives market.

The report also says that the introduction of alternative trading systems (ATS) in the securities market, which will compete with the KRX, offer market participants new options for minimising risk. Further, KRX is expected to fully overhaul its trading system by the end of 2013, to make it fully compatible for high-frequency trading.

Another important growth factor cited in the report is the relaxation and revision of certain legislations by the South Korean government to help encourage more local investment banks to set up in the country. Though risk-based regulations have been tightened, the government wants to foster a segment of organisations that can undertake a diverse range of asset management business and operate across a broader spectrum of activities than existing investment banks. This measure, along with the lifting of the hedge fund ban, will allow these entities to engage in various diverse financial services.

"While South Korea's derivatives market may not be able to maintain its steep growth curve, it should continue its solid growth due to support from substantial financial market reforms that are taking place," says KyongSun Kong, analyst with Celent's Asian financial services group and author of the report.

Reporting by Jaya Menon