Measures to vitalize derivatives market released
Transcription
Measures to vitalize derivatives market released
Derivatives investment strategy 30 Apr, 2015 Measures to vitalize derivatives market released Derivatives Plans to advance Korean derivatives market released Last week, on April 23, the Financial Services Commission (FSC) announced measures to stimulate the derivatives market. The three most important measures are the introduction of: 1) mini index products; 2) products to support spot markets; and 3) a new fee structure for options transactions. Key details include the launch of mini-futures and mini-options, KOSDAQ Single Stock Equity Futures, and RMB Futures. Further improvements needed However, it is disappointing that the measures have yet to address the lofty entrance barrier for individual investors and the transfer tax levied on derivatives transactions. Even for mini-products, the initial margin required is W30mn~W50mn, a hurdle most individual investors will find difficult to overcome. Mini-futures and options markets to grow fast As seen in the cases of E-Mini S&P 500 Futures and E-Mini NASDAQ 100 Futures, mini products ate into existing markets, reducing their transaction volumes. We expect to see a similar phenomenon in Korea. In Japan and Hong Kong, both existing and mini markets grew together. Derivatives investment strategy Measures to vitalize derivatives market announced On Apr 23, the FSC announced measures to vitalize the derivatives market as part of its capital market reform plan. Out of a total of 15 measures, the FSC identified action to stimulate the derivatives market as a quick and easy target. We need to note that these measures are a little different from the ones announced in June last year in terms of the policy approach. The three key measures impacting the derivatives market will be the introduction of: 1) mini index products; 2) products to support spot markets; and 3) a reasonable fee structure for options transactions. The FSC plans to introduce Mini KOSPI 200 Futures and Options, whose contracts will be only one fifth the size of their existing counterparts. As of Apr 28, 2015, one KOSPI 200 Futures contract was worth more than W130mn (268.55pts x W0.5bn = W134.28mn), while the mini product would cost only W26mn (268.55pts x W0.1mn= W26.86mn). Similarly, as of Apr 28, one KOSPI 200 Options contract cost W30mn, while the mini product would cost W6m. As for new products to support spot markets, the FSC will introduce KOSDAQ Single Stock Futures and New Dividend Index Futures, whose underlying asset is the New Dividend Index announced by the KRX in Oct 2014. In addition, RMB Futures will be introduced to help those engaged in RMB-based settlement and direct RMB transactions to manage forex risk. Efforts to rationalize the options fee structure in Korea will affect the current scheme where fees are charged in proportion to transaction value. Base fees and fee caps will be established for KOSPI 200 Index options and mini options, dollar options, and equity options so that large-value transactions benefit from economies of scale (and vice versa for small-value transactions). Derivatives market vitalization measures (summary) Measures Detailed plan Introduction of mini index products Introduce mini KOSPI 200 Futures and Options 1) Introduce KOSDAQ Single Stock Futures Introduction of new products to support spot markets 2) Introduce Dividend Index Futures Rationalization of options transaction fee structure Establish base fee and fee cap 3) Introduce RMB Futures Source: Financial Services Commission, Yuanta Securities 2 Derivatives investment strategy Disappointing in some respects Basically, we view the measures to facilitate the derivatives market as positive, but we do not believe they are innovative enough. For example, after the authorities announced tighter regulations and taxes on derivatives products in 2014 (10% capital gains tax on KOSPI 200 Futures and Options from Jan 1, 2016), no critical deregulations were announced this time. A leading example of such regulations is the high entry barrier to the derivatives market. Investors have to provide W30.0mn in initial margin for futures and W50.0mn for options, although for new mini products the per-contract price will be lower. For example, according to the announced plan, one Mini KOSPI 200 Futures contract would amount to W26.0mn (based on Apr 28, 2015, contract prices) and its 15% margin would be W3.9mn. However, investors need to basically provide W30.0mn in initial margin (the amount used for trading is W3.9mn, but investors become eligible for futures trading only after they deposit at least W30.0mn). Moreover, the 10% capital gains tax introduced in 2014 does not allow investors who do spot/futures arbitrage trading or trade futures to hedge against share price declines to offset futures gains/losses against equity gains/losses. Thus, the introduction of new products will not be enough to facilitate trading in Korea’s entire derivatives market. In particular, investors who left Korea’s index futures/options markets over the past two~three years mostly moved to spot and futures markets in neighboring countries. The introduction of new products is welcome news, but accessibility to those products does not differ from that of current products. We believe new derivatives instruments will not be enough to recover the Korean derivatives market’s global competitiveness and reinvigorate the capital market. However, RMB Futures and other plans related to spot products were announced, which would enable risk management and price discovery, improving the diversity of the derivatives market. Schedule to introduce new derivatives products New product/measure When Mini KOSPI 200 Futures and Options July KOSDAQ Single Stock Futures July Dividend Index Futures August RMB Futures September Set base fee and fee cap Around July Source: Financial Services Commission, Yuanta Securities 3 Derivatives investment strategy Review of E-mini S&P 500 Futures and E-mini NASDAQ 100 Futures in US We traced changes in the market in the wake of the E-mini S&P 500 Futures and Nasdaq 100 Futures, albeit just for two years. The Chicago Mercantile Exchange (CME) introduced E-mini S&P 500 Futures on Sep 9, 1997 and E-mini Nasdaq 100 Futures on Jun 21, 1999. At that time, as original futures were traded on both electronic and floor markets, mini futures were sure to facilitate the markets. Indeed, as the chart below shows, trading volume of E-Mini S&P 500 Futures rose sharply for the first two years of its launch, while trading volume of existing S&P 500 Futures stagnated or declined slightly. According to the KRX’s research, trading volume (original + mini) increased 2.4 times for US S&P 500 Futures, and 9.6 times for Japan’s Nikkei 225 Futures, and 2 times for Hong Kong’s Hang Seng Futures five years after mini futures were introduced in their respective markets. At the same time, for the 10 years since mini futures were introduced, annual trading volume growth of original and mini futures was 3% vs 46% for Japan’s Nikkei 225 Futures and 15% vs 53% for Hong Kong’s Hang Seng Futures, respectively. As Japan and Hong Kong’s futures markets were not big around the time of mini futures launches, both the original and mini futures markets expanded. But in the US, where original S&P 500 Futures were traded actively, the trading volume of the original S&P Futures declined, while that of E-mini S&P Futures increased. Given the number of individual investors in Korea’s derivatives market and sharp fall in trading volume of KOSPI 200 Index Futures and Options, the introduction of mini futures and options will likely boost futures and options trading volume and improve investor access to the market (assuming that there is no initial margin and no 10% tax on capital gains). Trading volume before and after introduction of E-mini S&P 500 Futures in the US ('000 contracts) S&P 500 Futures 250 ('000 contracts) E-mini S&P 500 Futures 120 E-mini S&P 500 Futures begin to trade 100 200 80 150 60 100 40 50 0 Sep-95 20 0 Mar-96 Source: Yuanta Securities 4 Sep-96 Mar-97 Sep-97 Mar-98 Sep-98 Mar-99 Derivatives investment strategy Trading volume before and after introduction of E-mini Nasdaq 100 Futures in the US ('000 contracts) Nasdaq 100 Futures 350 E-mini Nasdaq 100 Futures E-mini Nasdaq 100 begin to trade 300 250 200 150 100 50 0 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Source: Yuanta Securities 5 Derivatives investment strategy Disclosures & disclaimers This research report has been prepared for informational purposes only; it does not constitute an offer or a solicitation of an offer to buy or sell any securities or other financial instruments. 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