The Korea Futures Exchange (KOFEX) opened in Pusan on April 23rd this year, paving the way for the trading of composite derivatives products for the first time in Korea. The KOFEX began operation with four products - won/dollar currency options, dollar options, gold futures and CD interest rate futures - and hit the 10,000-contracts-per-day level just three months after its opening. The listing of government bonds in September provided the opportunity for further development. Albeit belatedly, the official inauguration of the KOFEX is expected to provide the nation's banking industry with the opportunity for further growth and stability by means of "hedging" against fluctuations in exchange and interest rates and commodity prices.
From the 1970s financial futures took over as the major item of futures trading after currency futures were first introduced into the Chi-cago Mercantile Exchange in 1972. Boosted by the success in trading of the world's major currencies, various kinds of financial futures products emerged such as bond futures and individual stock options. The exchange of financial futures grew rapidly owing to the gradual expansion in the fluctuation bands of interest and exchange rates since the 1980s and developments in the information and communications sector. Korea's futures market developed in three stages. The foreign exchange futures exchange opened in July 1968. The stock index futures market did not begin operation until May 1996; and it was not until this year that a Korean exchange for futures trading was launched. The domestic trading of foreign currency futures has grown steadily every year but remains relatively lackluster compared with that of the advanced nations, a phenomenon ascribed to local regulations regarding foreign currency trading. In 1998, the volume of actual foreign currency trading reached $701.4 billion on the foreign exchange market while that on the currency futures exchange amounted to $299 billion, the former accounting for 70.1 percent of the volume of trading on the entire foreign currency exchange.
In 1998, total exchange volume declined by 46.3 percent from a year earlier, as a result of the currency crisis and the slowdown of international trade under the austerity measures of the Inter-national Monetary Fund's (IMF's) restructuring program. Since April this year when the government unveiled a package of programs designed to liberalize foreign exchange trading, the exchange of real products and futures products increased dramatically. Foreign exchange trading amounted to $3.6 billion a day on average as of the end of September, a three-fold increase compared with the crisis year of 1998. In addition to the increase in transaction volume, the won/dollar foreign exchange gap between the Korean foreign currency exchange and the non-delivery forwards (NDF) market centered in Hong Kong and Singapore declined from 44 won in 1998 to 2 won this year, a strong indication of how the local market has improved in liquidity.
The Alternative Investment Despite the pressing need for hedging in the stock market, the launch of a futures exchange body was repeatedly postponed. However, the stock index futures exchange finally opened for trading May 3rd 1996 at the Korea Stock Exchange, a first in the history of Korean financial trading. The underlying indication of value on which the stock index futures trading is based is the KOSPI 200, a composite index of the stock prices of the leading 200 enterprises listed on the Korea Stock Exchange (KSE), the trading in which is equivalent to 70 percent of the entire market's volume. On July 7th 1997, stock index options based on the KOSPI 200 were introduced to the KSE.The successful launch of stock index futures had a tremendous impact in that it laid the groundwork for the establishment of the KOFEX and provided an opportunity to speculate on the fortunes of the stock market. Initially, the stock index futures exchange registered 3,000 to 4,000 contracts totalling 150 billion won in transactions per day on average, and has maintained a rapid rate of growth since its opening in 1996.
In February this year, the volume of transactions of stock index futures soared to 80,000 trades a day on average, worth some 3 trillion won, making the KOSPI the index on which the world's second largest volume of trading is based, after the S&P 500 of the United States. In terms of stock index option trading, Korea has emerged as the world's largest market. According to an analysis conducted by the KSE on international stock index option trading, Korea's KOSPI 200 option market was found to be the world's most heavily traded, with 16.58 million contracts made in the first quarter of 1999, ahead of France's CAC 40 with 7.72 million contracts, Germany's DAX with 7.66 million and Japan's Nikkei 225 with 1.54 million. The number of option contracts written on the KOSPI 200, which stood at only 31,890 a day on average in 1997, rose to 110,653 per day last year. This year, the number of option trades rocketed 9.3-fold from a year earlier to 295,626. Trading volume in value terms has leaped from 2.2 billion won per day in 1997 to 7.6 billion won last year and then surged to 26.4 billion won during the first quarter of 1999, a 12-fold increase from 1997. A comparison of KSE aggregate monthly trading volumes shows that the value of trading in stock index futures and options exceeded that of the real stock market as of February last year. The growth of the stock index futures market indicates it is being increasingly utilized as alternative investment to real stock market should it enter a downturn, and thus preventing the exodus of funds from the equity related area of investment. Experts are of the notion that the stock index futures market has served to invigorate the previously sluggish stock market since the latter half of last year. Foreign, individual as well as institutional investors have begun using the stock index futures exchange as a means of hedging, contributing to the stabilization of the stock market. Transaction Surge A law enabling the establishment of a futures exchange was passed in December 1995 designating the KOSPI 200 as the underlying index on which derivatives were to be based. In December, 1996, a meeting of promoters of the futures exchange was held and an association was inaugurated consisting of 35 member companies (a number which subsequently fell to the current 11 as a result of the financial crisis which erupted in late 1997). In July 1997 a permit was issued for the operation of the nation's first futures company.
Test operations were conducted twice, once in March and once again in April with the participation of investors. Since KOFEX opened, investor interest in the futures market continues heighten both causing and resulting in dramatic increases in trading. According to KOFEX, the volume of trading in futures hit 150,810 contracts in September, after reaching totals of 113,365 and 144,924 in August and July, respectively. The figures represent a more than two-fold increase over those registered in the April/June period. The steady increase in futures exchange trading has been prompted by increasing fluctuations in real prices on the foreign exchange and bond markets, which nudged institutional investors to hedge against crisis and individual investors to participate in the market more intensively. A series of measures taken by the KOFEX and its member businesses in June contributed to the continuing boom futures trading. They included allowing the use of substitute securities for deposits, cutting the trading commission by 30 percent, curtailing the proportion of deposits required for trading, allowing deposits in U.S. dollars, and the unveiling of a timetable to list national bond futures in September. The average daily futures trading volume continued to increase steadily, reaching 7,922 trades in September, after registering totals of 5,340, 1,649 and 1,096 in August, July and June, respectively.
In contrast, the share of CD futures, an interest rate futures product, fell below 20 percent. Futures businesses foresee that the share of national bonds futures will continue to increase due to greater fluctuation in the prices of the underlying assets compared to CD interest rates, and hence providing greater opportunities for gain. As the new products have emerged as major trading items more quickly than originally expected, they are forecast to contribute substantially to the growth of the futures market. Due to the rapid increase in the volume of trading, the nation's futures market may well said to have taken root as an integral part of the country's financial infrastructure, and is expected to undergo further growth by the listing of new products and cooperative ties with overseas futures exchanges. The envisioned opening of the futures exchanges to all institutional investors such as banks, fund and pension managers and mutual funds, who thus far have been prohibited in this regard, is expected to take the nation? futures exchange market to even greater heights.
LG Futures
In 1992 it signed a brokerage agreement with Lind-Waldock & Company (U.S.A.). In the following year it signed similar agreements with Macquaire Bank, an Australian investment bank, Triland Metals and Sogemin Metal (U.K.) In 1996, an agreement was signed with Goldman Sachs (U.S.A.), and in 1997, with AIG International, and ABN Amro (U.S.A.). LG Futures operates a computerized 24-hour trading system in line with the current global trend away from the previously widely used "open cry" system. The system allows customers to place orders anytime, from anywhere in the world, with real-time processing. Three divisions - its Sales, Inter-national Affairs and Planning & Management Divisions - comprise the company¡¯s organization. With a staff of 50, it is the largest employer in the domestic futures industry. The company makes its investment in futures based on the principle of ¡°authentic investment.¡±Corporate philosophy focuses on seeking high profits under conditions of risk management. It aims to provide differentiated strategies to customers depending on their risk-taking ability. Major target customers include corporations and institutional investors who require diverse hedging strategies. In addition, the company also welcomes inquiries from small- and medium-sized enterprises. It also plans to expand its business to accommodate individual investors with previous experience in futures transactions, and boutiques which have the ability to raise funds. The company has strived to attain international perspective and profile by introducing Wall Street specialists and presently looks to the KOFEX to gain a strong competitive edge in the world futures market. Contact: Park, Kee-hwan
Cheil Futures
Based on its experience in this area, Cheil Futures strives to provide outstanding customer service through the application of advanced financial techniques. Technical analysis is critical in determining futures trading strategies. To this end, the company has adopted various analytic methods and system trading support software for futures option financial trading through an alliance with Future Source of the U.S. and provided them to its customers. Cheil Futures also provides consulting services for small- and medium-sized trading companies on how to plan and utilize hedging strategies, particularly in regard to dollar futures. It is presently marketing its services to banks and other financial institutions by devising arbitrage trading strategies using spot, futures and options contracts. The company is seeking to forge joint arbitrage strategies with TOCOM, the Tokyo Commodity Exchange, and COMEX, the New York Commodity Exchange, to offer an advantage to its domestic clients in the area of gold futures. Contact: Kim, Jae-kun
Yes Futures
The company takes great pride in its rapid settlement procedure and the convenience of its electronic fund transfer system since it was designated as the won currency/foreign currency settlement bank for the Pusan KOFEX. Like other futures firms operated by banks, it also plans to launch a total financial service network through links to its FEB parent. In the wake of the opening of the futures market, Yes Futures is committed to positioning itself as a specialized risk management consulting firm by generating accurate market analyses and investment strategies. It provides information to clients on the Pusan KOFEX, as well as on leading overseas futures exchanges such as the CBOT, COBE, CME, NYMEX, LIFFE, and SIMEX where currency futures on the deutsche mark and Japanese yen, interest rate futures on U.S. Treasury Bills, Eurodollars, and Japanese government bonds, as well as stock index futures on the S&P 500, FTSE 100, and Nikkei 225 are traded. It also provides futures brokerage service on financial products as well as agricultural products, nonferrous metals, precious metals, and energy products. The company aims to build and maintain an expert group of "financial engineers." To this end, it recruited Kwon, Sang-soo, an MBA from Watton School in the United States, Park, Sang-kil, another MBA from UCLA, and other qualified futures brokerage personnel from the U.S. and the United Kingdom to augment the team. The company has strength in won/dollar currency futures and options, but also has expertise in CD, interest rate, and gold futures. Its primary target customers are corporates and financial institutions, as well as small- and medium-sized enterprises rather than individual customers. Contact: Ko, Kyung-shik
Tongyang Futures
It is now recognized as a leading company through its efforts to foster qualified human resources and pioneer futures brokerage services in the domestic market. Tongyang Futures is a full member of COMEX, in order to facilitate futures transactions for clients in the domestic precious metals market. Through its joint venture in Chicago, it invested more than $5 million to develop its Black Diamond independent trading system. The system, which has wide application in the U.S., provides accurate information on purchase and selling signals, selling points, as well as profit realization points. Its major advantage is that it is designed to avoid unanticipated risks of huge losses in futures trading by warning of arbitrary decisions by users. The company¡¯s major target customers are traders in small- and medium-sized enterprises, and individual business people, rather than large conglomerates or affiliates of big groups, viewing that SMEs are at a disadvantage compared to large conglomerates regarding their understanding of the futures market. Thus, it focuses on directing foreign currency risk management on their behalf, and providing a total level of service including the provision of a variety of trading information. On the subject of interest futures, it aims to develop interest hedging strategies to institutional investors such as investment trust firms, securities firms and banks. Regarding gold futures, it is presently seeking alliances with overseas companies to enhance its trading capability and furthering product development to persue arbitrage trading on COMEX and TOCOM. Contact: Jun, Sang-il by Samuel Bae ( takion@kotra.co.kr
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A futures exchange is concerned
with the contract purchase of products at previously-set prices
at a certain time in the future in order to hedge, i.e., avoid or
protect against the risk of price fluctuation through which investors
can engage in speculation based on a high level of leverage. Futures
exchanges are also venues for transactions in derivative products,
the value of which is determined according to the shift in prices
of underlying real assets such as bonds, securities, or foreign
currencies. The global value of futures trading now exceeds that
of real products. Some $400 trillion worth of futures trading took
place in markets worldwide in 1998, more than 10-fold global aggregate
value added.
The entire value of stock index
futures and option trading amounted to 405.90 and 2.22 trillion
won, respectively, last year, a sure demonstration of the success
with which the new financial market system has been introduced.
After the KOFEX site in Pusan
was determined in October 1998, preparations for the new exchange
began in earnest. Installation of a13-billion won system by Swedish
transaction technology company OM was completed in December 1998.
The system, variations of which are currently in use at 13 major
trading centers around the world, was modified in accordance with
Korean market conditions. Able to handle some 60,000 trades a day,
its capability can be increased according to the rise in trading
volume. Given the importance of computer trading, which accounts
for a large portion of transactions on the futures exchange, three
experts were dispatched from Sweden to monitor in the system continuously
in the event of a contingency situation.
The volume of transactions then
surged to 8,350 trades per day during the first eight days of October.
In particular, the share of national bonds futures in the value
of total trading following their Sept. 29th launch rocketed to 47.6
percent, indicating their popularity over previously listed derivatives.
LG Futures started as Seoul Futures
in July 1992 and was incorporated into the LG Group in 1994. LG
Securities is the primary shareholder, while LG Metals, LG Trading,
and LG Electric Wire are jointly the secondary shareholders. The
paid-in capital of the company stands at 10 billion won. LG Futures
formed alliances with overseas futures firms and investment banks
early on in order to acquire expertise in futures trading.
Cheil Futures was established
in 1991 to realize its vision for the 21st century of providing
a "Super General Financial Service Business." It began
first in overseas futures trading. It then advanced into overseas
futures fund operations and a futures options information service
to pioneer the domestic futures market. The company
later assumed a leading role in launching KOFEX. The company currently
operates six overseas futures funds, worth a total of $100 million,
by forming alliances with outstanding asset management companies
in the U.S.
Yes Futures was established in
September 1997 with an investment of 10 billion won by Foreign Exchange
Bank (FEB). FEB has been the recent subject of investment by Commerz
Bank of Germany.
Tongyang Futures, established
in March 1990, was the first domestic futures company. Right after
its establishment, it formed a local joint venture in Chicago to
position itself as a leader in the domestic futures market by gaining
expertise in the international futures brokerage business.
