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Derivative Markets at KRX

Derivative Markets at KRX Aug 10, 2005 Korea Exchange Topics Major Products Financial Futures Market : 3 Yr KTB Futures Currency Futures Market : USD Futures Options Market : KOSPI 200 Index Technology Risk Management Challenges Ahead Major Products

JasminFlorian
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Derivative Markets at KRX

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  1. Derivative Markets at KRX Aug 10, 2005 Korea Exchange

  2. Topics • Major Products • Financial Futures Market : 3 Yr KTB Futures • Currency Futures Market : USD Futures • Options Market : KOSPI 200 Index • Technology • Risk Management • Challenges Ahead

  3. Major Products • Major products : Most volume comes from stock-related derivatives < Daily avg. trading volume > (unit : contract) Type Underlying 2005* 2004 Stock Index Options KOSPI 200 8,765,732 10,126,736 Stock Index Futures KOSPI 200 169,585 223,329 Stock Index Futures KOSDAQ 50 233 828 Interests Rate Futures 3 Yr KTB 42,726 20,409 Currency Futures USD 10,313 8,361 • Other products : low liquidity < Total Volume > Futures 2005* 2004 Options 2005* 2004 5 Yr KTB 567 61 KOSDAQ 50 0 1 CD 0 0 Equity 1 1 MSB 1,636 2,621 USD 0 0 Gold 0 969 3 Yr KTB futures 0 0 * 2005 : by June

  4. 60,000 50,000 40,000 30,000 20,000 10,000 0 2000 2001 2002 2003 2004 2005 Financial Futures Market : 3 Yr KTB Futures • Daily average volume (unit :contract) • Volume of the 3Yr KTB futures has surged in 2005 due to the fluctuation of the interest rate this year 52,369 42,726 (+45%) 29,409 6,305 Source : KRX Review * 2005 : by June

  5. Financial Futures Market : 3 Yr KTB Futures • General trends by investor types (unit:%) Institutions • Growth to more efficient market * Institutional & foreign investors : gradually increasing * Individual investors : sharply decreasing 25.0% 88.0% 21.1% 85.4% 20.0% 84.0% 12.2% 15.0% Foreigners 80.0% 10.0% 77.0% 4.8% 76.0% 5.0% 2.0% Individuals 0.0% 72.0% 2000 2001 2002 2003 2004 2005 Source : KRX Review * 2005 : by June

  6. Currency Futures Market : USD Futures • Daily average volume (unit :contract) 10,313 +23.3% 12,000 • Has broken the record this year due to a high volatility of the USD spot rate • Open interests are increasing • for hedging purposes 10,000 8,361 8,000 5,556 6,000 4,000 2,000 0 2000 2001 2002 2003 2004 2005 * 2005 : by June Source : KRX Review

  7. Currency Futures Market : USD Futures (unit:%) • General trends by investor types Institutions 81.5% 20.0% 82.0% • Has become a more attractive market to foreign investors * Domestic investors are gradually decreasing Individuals 16.9% 81.0% 15.0% 10.5% 80.0% 10.0% 10.6% 79.0% Foreigners 5.0% 78.0% 78.3% 1.6% 0.0% 77.0% 2000 2001 2002 2003 2004 2005 * 2005 : by June Source : KRX Review

  8. Options Market : KOSPI 200 Index • Daily average volume (unit : contract) • Recorded the first ever decrease in 2004, and fell beneath 10 million contracts per day in 2005 • Still, the most liquid product in the world (source: FIA data) 12,000,000 11,488,765 8,765,732 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 - 2000 2001 2002 2003 2004 2005 * 2005 : by June Source : KRX Review

  9. Options Market : KOSPI 200 Index • Rationale to the decrease in KOSPI 200 options volume. (unit:%) 60 • High volatility of the stock market caused by the foreign currency crisis has been recovered to pre-financial crisis level • With the stock market stabilizing, the volume is recording a decrease 55.3 50 45.5 40 44.3 30 35.7 30.1 34.2 20 27.8 18 10 24.3 17.4 0 96 97 98 99 00 01 02 03 04 05 * 2005 : by June Source : KRX Review

  10. Options Market : KOSPI 200 Index (unit : %) • General trends by investor types 70.0 • The whole market structure in terms of market participation has evolved to be more institutional investor oriented • * Individual investors : • recorded the lowest market share • in 2005 * Institutional investors & foreign investors : recorded the highest in 2005 66.0% 60.0 Individuals 50.0 45.1% 40.0 Institutions 34.0% 30.0 20.9% 24.0% 20.0 Foreigners 10.0 9.5% 0.0 2000 2001 2002 2003 2004 2005 * 2005 : by June Source : KRX Review

  11. Technology • Two systems ⇒ To be integrated to a single platform • KRX System (In-house trading system) * for the stock related derivatives (KOSPI 200, STAR, Equity) • Advantages : • Timely adoption if rules & regulations are revised • Cost saving • KRX Commodity Futures System (Out-sourced) • * for the KTB & Currency etc. • Advantages : • New products easily implemented • Used by 20+ exchanges around world

  12. Technology • Environment : rapid increase of internet users • Nationwide Internet network cable installation • Home, Office, PC trading arcade etc • Well developed Home Trading Systems • Fierce competition to attract more customers among member firms • Easy access to online real-time information • Making it easier for individual investors to trade options • Spreading websites providing market analysis and research

  13. Risk Management • Conservative margin system to guarantee settlement • Initial Minimum Deposit : as an entry barrier • Up-front Margining before Transactions • Margin checked automatically at a member’s system when ordering before transaction • Initial margin: 15% / Maintenance margin: 10% • Post Margining after transaction • Applies to the qualified institutional investors • Discount rate for hedging & arbitrage trading

  14. Challenges Ahead • A full-fledged derivative exchange with diverse products • New Products planned or reviewed * STAR 30 & KRX100 index/ Energy product/10 Yr KTB futures • To revitalize the markets with low liquidity • * Equity options / 5 Yr KTB futures / USD options • An internationalized exchange • To attract international investors • * Exempted security by SEC to 3Yr KTB futures • * No Action relief from CFTCfor KOSPI 200 futures • Linkage with other foreign exchange • To conform to the global standard

  15. Challenges Ahead • Equity Options (Launch Sep. 26. 2005) • Equity Options market • Underlying Assets : from seven to thirty Blue-chip stocks • Settlement method :from physical delivery to cash settlement • Multiplier : × 10 • Purpose • To provide easy access to the market • To supply an accurate hedging instrument for institutional investors • To revitalize the market with low liquidity

  16. Challenges Ahead • STAR 30 Index futures market (Launch Oct. 24. 2005) • STAR 30 index futures(financial stability etc) • Underlying Assets : STAR 30 index based on stock at KOSDAQ • Base Index : 1000 Points vs 100 Points(KOSPI 200 index) • Trading Unit : 10,000 KRW vs 500,000KRW(KOSPI 200 index) • Offset ratio among index products : 50% • Purpose • To supply a hedging tool for the KOSDAQ market • To revitalize the market replacing KOSDAQ 50 with low liquidity

  17. Thank You !

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