The $63 Billion Market That Korea's Stock Exchange Wants in On

  • Bourse plans a revamp of its structured product offerings
  • Sales of rival OTC notes slumped by a third in September

South Korea’s stock exchange is revamping its structured note offering as it taps in to rampant demand for rival over-the-counter products that have fallen prey to shaky markets.

The bourse is pushing an alternative to the OTC market that’s come under closer scrutiny from regulators after sales for equity-tied notes, which topped $63 billion in 2014, slumped to a near two-year low. It’s hoping to boost exchange-traded notes by offering new products and getting more global investment banks to take part, according to a statement. At the same time, it’s planning more exchange-traded funds and loosening rules for them.

“Korea Exchange’s move to boost ETFs and ETNs is based on the regulator’s vision,” said Gyun Jun, a Seoul-based head of derivatives research at Samsung Securities Co. “The Korean regulator is more supportive of exchange-listed products such as ETFs and ETNs as compared to equity- and derivative-linked securities for their transparency and simplicity.”

Surging demand from life insurance and pension funds in a population poised to become the world’s oldest by 2060, coupled with record low interest rates, drove sales of OTC equity-linked structured notes to a record high in 2014. While still averaging $7 billion a month in the first half of this year, sales dived by a third in September to just $3.2 billion, the lowest in almost two years, after China’s yuan devaluations roiled equity markets.

The slump spurred the Financial Services Commission to warn about investors focusing heavily on single indexes such as the Hang Seng China Enterprises Index, which accounted for 38.5 percent of equity-linked note issuance at the end of June. The watchdog said it may impose curbs if such concentration risk heightened. It hasn’t acted yet and is monitoring developments, according to an e-mailed response to questions.

Early Days

For exchange-traded notes, it’s still early days. Korea’s market only started in November 2014 and volumes were at 33.4 billion won ($30 million) last month, with the number of listings at 55. In Japan, the only other Asian nation that lists structured notes, there are 29 while the U.S. has 200.

“We will continue to develop new products to meet the diverse needs and demand of investors,” Cho Byung In, team leader of ETN markets at the exchange, said by phone. 

While Korea’s ETN market has grown, trading volumes are small and challenges remain, Samsung’s Jun said.

“The insufficient education and complex payoff are the Achilles heels of ETNs” that issuers are trying to overcome, he said.

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