S. Korea FSC Announces Derivatives Market Reforms

The minimum deposit requirements will be abolished for professional investors and eased for retail investors. The minimum 20-hour compulsory training requirement will be reduced.

South Korea’s FSC (Financial Services Commission) has announced regulatory reforms aimed at strengthening the appeal of the country’s derivatives market and strengthen its role in risk hedging and price discovery.

The reforms as part of the government’s broader efforts “to vitalise capital markets and support the real economy”, the FSC said in a statement. According to the regulator’s data, the share of institutional investors in derivatives trading in 2018 decreased from 48.7 percent to 36.1 percent, and retail investors declined from 25.6 percent to 13.5 percent.

“Excessive entry barriers act as obstacles to retail investors, while strict margin requirements hinder institutional investors’ participation,” the regulator said.

Under new rules to be introduced this year, the minimum deposit requirements will be abolished for professional investors and eased for non-professional investors.

Current regulations require a retail investor to deposit a minimum of KRW 30 million (USD 25,200) to buy futures or options and KRW 50 million to sell options. Under the new rules, this will be eased to KRW 10 million and KRW 20 million, respectively.

The minimum 20-hour compulsory training required of retail investors before they are allowed to trade derivatives markets will be reduced to one hour of education and three hours of mock trading.

The FSC will also abolish a requirement for institutional investors to deposit an extra margin of 10 percent of the credit risk limit, which currently required in addition to 100 percent of the volume exceeding the credit limit.

The omnibus account system will be also improved to address concerns of foreign investors. Currently the number of algorithm accounts allowed to register with an omnibus account is limited to three. The FSC plans to increase this limit.

The KRX will also expand its market-making activities from currently only the nearest futures contract to also include the next closest futures contract, and grant more incentives to market makers for low-liquidity products.

The KRX also plans to list new derivatives products and allow securities firms greater autonomy to develop their own products.

A trade repository for OTC derivatives will also be introduced in October 2020.

After 2021, the FSC and KRX will work towards more central clearing of OTC derivatives. Currently only won and US dollar interest rates swaps are centrally cleared through KRX. This will expand to non-deliverable forwards, currency rate swaps and credit default swaps.

After 2022, compression services will also be introduced. Compression enables aggregation or netting of multiple offsetting OTC derivatives trades to effectively reduce the notional value of a portfolio while maintaining the same net risk.

 

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