South Korean Derivatives Market Takes a Dive

South Korea’s derivatives trading took a sharp plunge in July.  The drop is due largely in part to stricter regulations in the country, coupled with global worries over the Eurozone debt crisis.

In August 2011, the daily turnover of the local derivatives market averaged 84.3 trillion won (US$ 76.3 billion).  During the last 6 days of this month, the derivatives market averaged 54.5 trillion won (US$ 47.8 billion), a drop of nearly 35 percent.

The daily turnover of options fell 56.25 percent to 1.11 trillion won during the cited period.  Futures plunged 34.7 percent to 53.3 trillion won.

According to the Korea Exchange (KRX), for the first time in 13 years, South Korea lost its status as the top derivatives trader in the world to the U.S. based Chicago Mercantile Exchange.

The market decline came as South Korea’s financial regulators began to implement stricter rules for derivatives trading.  The market now has to comply with rules raising the minimum price to buy or sell option contracts in an attempt by the country’s watchdogs to limit individual investors.

The current market conditions in the country may cause an outflow of foreign capital as some firm consider pulling out completely from local markets.  According to the KRX, foreign brokerages Goldman Sachs and UBS have already withdrawn from the local equity-linked warrants (ELWs) market.

Currently, South Korean regulators are pushing to impose taxes on derivatives transactions, creating even more uncertainty in the South Korean markets.

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