Three local South Korea securities houses have received licences to trade over-the-counter derivatives following regulatory changes that opened up the country’s OTC market to securities firms in July.
Samsung Securities, Daewoo Securities and LG Investments and Securities all received authorisation to trade OTC derivatives in October. However, the licence does not permit the firms to access the potentially lucrative retail derivatives market, with securities firms at present limited to corporate and selected institutional clients.
South Korea’s retail investors are the driving force behind the success of the Korea Stock Exchange’s Kospi 200 futures and options contracts, the most actively traded exchange-traded derivatives contracts in the world, and traders believe the retail market is ripe for new equity-linked derivatives products. How- ever, South Korean law currently prohibits securities firms from selling derivatives products such as equity-linked notes and warrants to retail investors.
Nonetheless, there are hopes that South Korea’s finance ministry will reclassify these structures as ‘securities’ as early as December, paving the way for securities firms to access the retail market next year. “We expect a boom in OTC derivatives products going forward,” says Seoul-based Hong Shik Kim, head of trading and derivatives at Goodmorning Shinhan Securities, whose firm applied for a licence in October. “There is big potential for the retail market.”
Along with Goodmorning Shinhan Securities, Hana Securities, Dongwon Securities and Woori Securities have also applied for OTC derivatives licences. Dongwon Securities and Woori Securities had originally applied at the same time as Daewoo, LG Investment and Securities and Samsung, but were forced to revoke their applications after failing to meet internal risk management control requirements.
For a securities company to receive a licence, it has to have capital reserves of 300 billion won ($243.6 million) and a net capital ratio of 300%, and has to implement stringent internal risk management systems.
Many securities houses have been preparing to build up their derivatives capabilities for the last few months, with establishment of dedicated teams and a series of new appointments. Daewoo Securities established a nine-strong OTC derivatives trading depart- ment earlier this year headed by Jung-Min Lee, while LG Investment and Securities set up a dedicated derivatives product sales team a year ago, headed by JY Choung. Samsung Securities hired Alex Choi, an ex-Goldman Sachs banker, in September to lead the firm’s efforts as head of a new capital markets division, while Goodmorning Shinhan Securities, formerly Good Morning Securities prior to its merger with Shinhan Securities in August, established a dedicated OTC derivatives product centre last year, headed by Kim, who joined the firm from BNP Paribas in Hong Kong.
With South Korea’s interest rate markets heavily dominated by banks, securities companies have largely chosen to focus on equity derivatives in the initial stages, including equity-linked notes and options. However, some plan to branch out to fixed-income and foreign exchange derivatives. “We will focus on the equity side first of all, but in the long run we will look to fixed-income and foreign exchange products as well,” says Daewoo’s Lee. SF, NS