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(LEAD) S. Korea to expand autonomy of derivatives market

2014/06/17 17:11

SEOUL, June 17 (Yonhap) -- The South Korean financial regulator said Tuesday it will open a new derivatives market, including U.S. dollar futures night trading, to promote the high-risk, high-return financial sector.

The Financial Services Commission (FSC) said it will open the KOSPI 200 Volatility index, or V-KOSPI 200 futures, and the U.S. dollar futures night market before the end of this year. Other derivatives, including Chinese yuan currency futures or crude oil futures, are also under consideration, it added.

The FSC also said the main bourse operator, the Korea Exchange (KRX), will be allowed to decide the number of listed derivatives products and their prices, which currently are controlled by financial authorities.

Also, individual investors can participate in the high-risk market after completing a compulsory education program.

Banks will also be permitted to directly buy and sell bonds or currency derivatives on the main bourse.

"Now, only securities firms can engage in direct derivatives transactions. This obstacle has hampered development of the derivatives market," said Lee Hyun-chul from the FSC.

As part of the government's efforts to offer diversified derivatives, exchange trade notes (ETN) will be up for sale in the local market in the near future. An ETN consists of actual securities or sometimes commodity or currency derivatives, linked to the performance of a market benchmark or strategy.

The authorities will demand the providers give investors easier-to-understand explanations of the financial instrument and comparisons with other derivatives because equity hybrid products including equity linked securities (ELS) and equity linked warranties (ELW) can cause heavy financial losses.

In order to improve the transparency of the over-the-counter (OTC) market, the FSC will introduce a trade repository (TR) that centrally collects and maintains the records of OTC derivatives.

The Group of 20 summit in 2009 agreed that all OTC derivative contracts would be cleared through central counterparties (CCPs) from 2013 and that OTC derivatives contracts should be reported to TRs.

South Korea set up a CCP for OTC derivatives in 2013 and has plans that interest rate swaps, non-deliverable forwards and credit default swaps will be subject to the CCP step by step, the regulator said.

CCPs refer to clearing houses that originally managed market participants' risks by taking responsibility for derivatives settlements but whose role has expanded to governing volatile OTC markets in the aftermath of the 2008 global financial crisis.

The FSC's move aims to increase the autonomy of the local derivatives market, the world's eighth-biggest, where 821 million orders were made in 2013, and create new markets that can lure more investors.

Derivatives refer to financial products that draw value from other financial instruments such as stocks, bonds, currencies and commodities as well as events.

According to the FSC, only 15 derivatives products are being traded on the main bourse as the authorities have strictly limited listed items on speculation concerns, compared with 1,303 products in the United States and 100 in Japan.

The FSC said it will simultaneously intensify supervision of the trading market to prevent illegal trading and speculative transactions, while promoting market stability and financial growth.