Still looking for yield


The verdict is unanimous. The themes of last year will continue into 2003, meaning that yield enhancement is once again going to be key for investors in the region. With interest rates at record lows, and few strategists seriously expecting a rise in rates in the near term, investors are expected to continue buying range accruals, credit-linked notes and structured credit products over the coming months.

The only difference this year is likely to be a greater number of structured products denominated in local currencies, rather than US dollars. Others suggest that this year could see the beginnings of local currency credit derivatives markets in one or two countries, with South Korea and Taiwan the favourites to emerge first, regulations permitting (see page 10 or Open to innovation.

In fact, the regulatory environment in South Korea is going to be eyed closely by a number of participants over the next few months, perhaps most avidly by the country’s securities houses. Having been allowed to apply for over-the-counter derivatives licences since last July, South Korea’s securities firms anticipate an explosive market for retail investment products such as warrants, equity-linked notes (ELNs) and capital guaranteed funds. And indeed, their optimism seems well founded – the exchange-traded Kospi options contracts, for instance, are the most actively traded in the world.

But while three securities firms had received derivatives licences by the time Asia Risk went to press, they are currently prohibited from accessing the country’s retail investors. Dealers expect regulations to change as early as next month, starting with approval to offer ELNs – at least they hope so, given the investment they have made in derivatives systems and personnel. In our cover story (see pages 8–9 or Breaking down barriers) Asia Risk looks at the current regulations and the hoped-for changes.

Elsewhere in South Korea, the country’s banks are stepping up their risk management systems to more adequately cover their consumer loan portfolios. A surge in consumer debt over the past year has led to a steady rise in defaults, particularly among credit card holders, prompting the country’s regulator to impose a series of new measures to cut back on delinquencies, including the adoption of individual credit review systems. Bank risk managers have been focusing on these requirements, along with the ongoing integration and improvement of current risk systems. Preparation for the Basel Accord, meanwhile, has fallen slightly by the wayside, as banks prefer instead to wait for the final Basel documentation due at the end of the year (see pages 28–29 or Waiting for guidance).

And they’re not the only ones. A recent survey by consultants KPMG shows that Hong Kong banks, generally acknowledged to be at the vanguard of risk management in Asia, are lagging behind European institutions in preparing for Basel II (see page 6 or HK banks lag in Basel II preparations). With three years to go until the scheduled implementation of the Basel Committee’s recommendations, consultants warn that banks need to begin their preparations in earnest over the coming year if they are to comply.

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