Jun. 30, 2009 (The Korea Times) -- People are apt to regard developed Western countries like the United States as the "financial centers of the world," and underestimate the Korean financial system as far underdeveloped when compared to those countries.
It is mostly undeniable, but it is a totally different story when we look into the Korean derivatives market. As Alan Greenspan, the former chairman of the Federal Reserve Board, mentioned in his speech that the Korean option market became the most heavily traded in the world and the U.S. should learn from its success, we should be proud of the growth of the market in roughly 10 years, a relatively short period of time.
KOSPI 200 Options, the most successful derivatives product here, traded a daily average of 11,160,000 contracts, or 1.2 trillion won in 2008. It has been the most traded derivatives product in the world for nine consecutive years in terms of trading volume. Thanks to this, the Korea Exchange (KRX) was ranked the third biggest derivative exchange after Chicago Mercantile Exchange (CME) of the U.S. and Eurex of Germany.
Despite the outstanding growth, the Korean derivatives market is facing a huge challenge because of the rapid changes in the domestic and overseas trading environment. Along with the recent developments, which have affected local financial markets, including financial crisis ignited by the U.S. sub-prime mortgage and enactment of the Financial Investment Services and Capital Markets Act, intensified competition among exchanges and advent of mega-exchanges by merger require evolution of the Korean derivatives market to the next generation.
To survive the challenges, the KRX is using various methods to enhance its global competitiveness by building a foundation for another leap to the growth and eventually to become the "Global Derivatives Hub." Among the series of recent efforts, we obtained a few successful results and one of them is signing an agreement with the CME Group (NASDAQ:CME) and Eurex to list the KRX's world-famous KOSPI 200 Index Futures and KOSPI 200 Index Options on each market, respectively.
This will not only enable round-the-clock trading of the KOSPI 200 Index related products, but also foster foreign investors' investment in the Korean financial market. We also believe the alliance with the major derivatives exchanges all over the world will keep us ahead of other competitors and eventually result in enhancement of local financial industries' competitiveness.
As the only exchange in Korea, the KRX will not neglect searching for the new growth engine for the future. First, we will do our best effort to capacitate Carbon market including related derivatives trading in the KRX. Establishing Carbon market has many meanings not only to environment related businesses but also to financial industry as it provides future investment opportunity to Green business.
Since the Korea Stock Exchange, now a part of the KRX after a merger in 2005 began securities trading in 1956, we have been successfully operating securities and derivatives trading, clearing and settlement system for the market for more than half a century. We believe the KRX is the best market for initiating Carbon trading in Korea with low cost and high efficiency in the national perspective, because we can utilize current facilities for trading, professional manpower and our long experience in managing the market.
Second, we believe settlement and clearing service for over-the-counter (OTC) derivatives products like currency swap is one of the businesses that the KRX should develop and provide to Korean financial system. As we have witnessed in the recent global financial crisis initiated by the U.S. sub-prime mortgage, default risk of OTC derivatives is far greater than that of exchange-traded derivatives. We will try to work as the final safeguard to risks in derivatives market by providing stable clearing and settlement service to OTC derivatives products as well.
Third and lastly, we are doing research to list new derivatives products that satisfy various investors' needs by providing diversified derivative products from Volatility Index Futures, which helps investors avoid risks in volatile securities market to Chinese yuan futures to help importers and exporters who are trading with China to hedge possible exchange rate risk. Also, we are studying to introduce short-term interest rate futures, futures products based on major overseas indices and commodity derivatives including crude oil futures to provide diversified investment opportunities to market participants.
In last January, the Korean government designated Seoul and Busan as "International Financial Centers" in Korea and many people showed interest and anticipation to the two cities' future as financial hub in the world. The KRX is ready to run to attain our goal to become the "global hub derivatives market" and with the support from the government and the City of Busan, it is not a mere dream to make the second largest city in Korea as a "Chicago of Asia," an international financial center specialized for derivatives products in Asia. It is the right time to move for the future.
