Derivative Markets at KRX

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
• lt Daily avg. trading volume gt

(unit contract)
2005
2004
Underlying
Type
KOSPI 200
Stock Index Options
8,765,732
10,126,736
KOSPI 200
169,585
223,329
Stock Index Futures
KOSDAQ 50
233
828
Stock Index Futures
3 Yr KTB
Interests Rate Futures
42,726
20,409
USD
Currency Futures
10,313
8,361

• Other products low liquidity
• lt Total Volume gt

Futures
Options
2005
2005
2004
2004
5 Yr KTB
KOSDAQ 50
567
0
61
1
CD
Equity
0
1
0
1
MSB
USD
1,636
0
2,621
0
Gold
0
0
3 Yr KTB futures
969
0
2005 by June
4
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
2005 by June
Source KRX Review
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

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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 members
  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 CFTC for 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

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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

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Thank You !