Korea opens retail market

South Korea’s securities firms have got the go-ahead to offer selected derivatives products to the country’s retail investor market, more than six months after regulations were changed to allow securities houses to apply for over-the-counter derivatives licences.

Securities firms with derivatives licences can now market equity-linked notes and warrants to retail investors following the reclassification of these products as ‘securities’ by the Ministry of Finance and Economics in late February. Securities houses have been eagerly awaiting the reclassification of these products since a change in regulations last July allowed them to apply for OTC derivatives licences. Dongwon Securities, Hana Securities and Goodmorning Shinhan Securities are the most recent to gain approval from country’s regulator, the Financial Supervisory Commission, in February. They join Daewoo Securities, LG Investment and Securities and Samsung Securities, which received approval in October last year.

Until now, those approved firms have been restricted to marketing derivatives to corporate and selected institutional clients. However, with the reclassification of ELNs and warrants, securities houses can now tap South Korea’s potentially lucrative retail investor base. The Korea Stock Exchange’s Kospi 200 options and futures contracts have been two of the most actively traded listed derivatives in the world for the past few years – a feat attributed to the high participation of retail investors.

Hong Shik Kim, head of trading and derivatives at Goodmorning Shinhan Securities in Seoul, reckons the ELN market could be worth $8.5 billion a year, while a Korean warrants market could this year generate notional volumes worth $5 billion. “I think [the change in regulations] will have a huge impact on the retail investor market,” he says.

Foreign firms are also looking to play a greater part in the South Korean derivatives market. Lehman Brothers, for example, plans to structure 2.5 trillion won ($2 billion) of South Korean equity-linked securities to be issued and sold by Samsung Securities and Goodmorning Shinhan Securities. “Samsung and Goodmorning Shinhan Securities have the derivatives dealer licences onshore, and investors are now allowed to purchase equity-linked securities issued by their dealers,” says Timothy Throsby, managing director and head of equities for Asia at Lehman Brothers in Tokyo.

The securities are linked to a basket of South Korean listed equities and offer investors the choice between 10% or 20% first-loss protection on downside market risk by embedding either a 100/90 put spread or a 100/80 put spread. The investor simultaneously sells call options on some of the stocks in the basket, using the premiums from the call options to fund the put spread. Investors still participate in the upside of over 70% of the stocks in the basket, says Throsby. The three-year notes are aimed at domestic institutional investors.