Breaking: South Korea Deregulates Retail OTC Derivatives Market

The financial regulator is taking steps to revitalize the sector by cutting minimum deposits

South Korea has long been considered a mute market for the retail brokerage industry due to the relatively high minimum deposit requirements for retail traders. The South Korea Financial Services Commission is taking a sharp turn to revitalize the sector by cutting a lot of red tape across the market.

First and foremost, the barrier of entry to trading derivatives products by South Korean retail investors has been cut from KRW 30 million ($25,300) to 10 million ($8,500). Whether or not this measure is dictated by the recent unfolding of the cryptocurrency craze in the country is unclear, but starting from Q4 2019, local retail investors have an easier entry point onto traditional financial markets.

The $8,500 limit applies to futures and buying options if a customer is willing to also be able to sell options, the figure doubles to around $17,000 or KRW 20 million. The amount is just above the average of $6,000, which crypto investors in South Korea spent on investing in digital assets in 2018.

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The FSC is citing improving access to investing in the real economy as one of its main goals with the new regulation.

Institutional Investors Also Benefit

While retail investors enjoy an easier point of entry into the market, institutional traders are also set to benefit from the new regulations. Institutional investors have been required to deposit an extra margin of 10 percent of their credit risk limit, in addition to 100 percent of the volume exceeding the credit limit. The requirement will be abolished in Q3 2019.

The FSC also aims to facilitate the development and listing of new derivatives. The regulator will allow more autonomy for securities firms in developing new derivative products in the final quarter of 2019. Earlier in Q3, the FSC will enable for several market-making obligations to be updated.

Firms will be able to expand from the nearby futures contract, the future or option with the shortest maturity or settlement date, to the next closest futures contract. At the same time, more incentives will be granted to market makers for low-liquidity products.

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Local OTC Markets Stagnation

The upcoming deregulation of the trading industry in South Korea is a result of stagnating trading volumes in the OTC market. Derivatives trading volume fell sharply from its peak in 2011, and while it recovered to an extent after 2015 due to increased trading of index products, the market has been underperforming.

Since South Korea introduced tighter regulations aiming to curtail speculative trading in 2011, the soundness of the derivatives market improved, increasing the number of longer-term trades.

Foreigners accounted for 50.4 percent of total derivatives markets in 2018, which was up from 25.7% in 2011. Over the same period, the share of institutional investors decreased from 48.7% to 36.1%; and retail investors from 25.6% to 13.5%.

“Excessive entry barriers act as obstacles to retail investors, while strict margin requirements hinder institutional investors’ participation,” the FSC outlined in its official announcement on the matter.

Crypto Markets Competition

Over the past couple of years, South Korea became one of the main centers for trading cryptocurrencies. While the FSC doesn’t reference that retail traders have been heavily vested in speculating with digital assets, the disproportionate interest of investors in cryptos could have played a role in deregulating traditional financial markets.

At the peak of the cryptocurrency boom in the final quarter of 2017, the South Korean government has been singling out cryptocurrency speculation as a serious problem in schools among other places.

South Korea’s lower barrier of entry into traditional financial markets could significantly impact the appetite of local retail traders to commit to products which have been widely accessible in other regions such as Europe, Japan, and the US.

Back in March, the FSC’s Chair stated that banks in the country should open up to partnerships with fintech firms

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