Korea Exchange

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Korea Exchange (KRX)
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Founded 2005
Headquarters Busan, S. Korea
Key People Kyung-soo Choi, Chairman and CEO
Products KRX KOSPI 200 Index derivatives
Website www.eng.krx.co.kr

Korea Exchange (KRX) is the sole platform for the listing and trading of stocks, bonds and derivatives in Korea. It was formed on Jan. 27, 2005, from the merger of the Korea Stock Exchange (KSE), the Korea Futures Exchange (Kofex), the Kosdaq Market and the Kosdaq committee, part of the Korea Stock Dealers' Association. It provides an electronic platform for the trading, clearing and settlement of cash equities, bonds and derivatives.

The exchange's derivatives volumes are driven by the Kospi 200 Index options and Kospi 200 Index futures contracts. Until 2012, the Kospi 200 Options contract was at the top of the FIA's volume tables for almost a decade, becoming the most actively traded derivatives contract in the world in 2011 with 3.67 billion contracts traded.[1] However, in 2012 the Korean authorities decided that too many retail investors were speculating in various ways on the direction of the stock market, so they quintupled the index multiplier, making the contract five times more expensive to trade, according to Futures Industry Magazine.[2]

Volume at the exchange was 692,990,540 in 2016, down 12.8 percent from the previous year, making it the world's 12th largest derivatives exchange.[3]

In August of 2014, KRX said that a 2.5 per cent stake in the exchange was for sale and that CME Group, Deutsche Börse and Standard & Poor’s had all expressed interest. The stake is being offered ahead of a planned merger between brokers NH Investment & Securities and Woori Investment & Securities, which when completed would have a combined stake in KRX of 7.5 per cent, higher than the 5 per cent that Korean regulations allow. The 2.5 per cent stake is worth more than 90 billion Won ($88 million), according to the Financial Times.

CME Group offers Kospi futures to its customers through Globex, and Deutsche Borse's derivatives arm, Eurex, offers Kospi options in Europe via a mutual agreement.[4]

In January of 2015 South Korea's Ministry of Strategy and Finance decided to release Korea Exchange from direct state control. [5] The decision was made after the Korea Exchange met the requirement for delisting by overhauling its management style and cutting excessive welfare benefits given to its workers by more than 68 percent. Passage of a revised financial market act in May 2013 lifted the exchange's monopoly control of the stock market, which also enabled the delisting. Although it will lose its monopoly status, KRX can now seek to set up overseas operations that can benefit the exchange in the long run.[6] The Financial Services Commission continues to supervise the exchange.

Key Developments

After the completion of the merger, ownership was split in 2007 between 44 financial and government entities, led by Woori Investment Securities (6.3 percent); Daewoo Securities (3.2 percent) and Daishin Securities (3.2 percent). Overseas owners include JP Morgan, Citigroup and Australia's Macquarie Bank.[7]

The Korea Exchange was the world's busiest in 2009-2011, according to the Futures Industry Association's annual surveys. [8] The FIA report, published in early April, 2010, notes that the number of futures and options traded on the Korea Exchange rose 8.3% on the 2008 figure to hit 3.101 billion, topping larger rivals Eurex and the CME Group. The Korea Exchange's Kospi 200 Options (KRX) also headed the FIA's list of the wold's top-20 equity index futures and options with 2.921 billion options traded, up 5.6% on the 2008 figure.

In 2012, however, KRX had fallen to fifth place and in 2013, ninth place, after the exchange quintupled the multiplier on its flagship Kospi 200 futures and options contracts.

In December 2013, an employee at Hanmag Securities erroneously placed orders to buy and sell Kospi 200 index options, incurring $43.8 million in losses and bankrupting the firm. KRX covered the shortfall from its emergency fund.[9] Later that month, the exchange began implementing risk management practices to avoid a repeat of the Hanmag debacle, including the installation of a "kill switch" which would shut down trading from a broker dealer during a technology glitch or large error.[10]

Technology

The KRX exported its in-house trading platform EXTURE+, to Azerbaijan at the end of 2014. It also entered into a contract with the Securities and Exchange Commission of Thailand to export a market surveillance system in February 2015. KRX was selected as the executing organization of the Capital Market IT Infrastructure Development Project initiated by the Azerbaijan State Securities Committee in December 2014. KRX previously won contracts to establish IT infrastructure in Cambodia, Laos, Vietnam, and Uzbekistan.

KRX plans to expand its IT business to Eastern Europe and the Middle East in 2015.[11]

Regional Bourses

KRX has taken a lead in the development of several exchanges in Southeast Asia and beyond:

  • In 2006, KRX set up the infrastructure of the Malaysian stock market, signing a $13 million deal with Bursa Malaysia.[12]
  • In 2010, the exchange signed a deal with the government of Uzbekistan for the modernization of its markets.
  • In January 2011, KRX teamed with the Laotian government to establish a stock exchange there in return for a 49 percent stake.[13]
  • In July 2011, the Cambodia Stock Exchange was launched, with KRX holding 45 percent of the shares.
  • In 2012, KRX signed a $30 million deal with Vietnam to set up a next-generation stock market system and market surveillance system.[14]

Key products

The Korea Exchange's main benchmark stock index is the KRX KOSPI 200 and listed futures and options contracts tied to its value are the world's most-traded derivatives contracts, according to the Futures Industry Association.

Key people

Kyung-soo Choi was elected chairman and chief executive officer in the fall of 2013.

The previous chairman, Bong-soo Kim, became chairman and CEO of the KRX on December 30, 2009.

Contract Volume

Year Total Annual Volume* Percent Change
2016 692,990,540 (-) 12.8%
2015 794,935,326 17.3%
2014 677,789,082 (-) 17.4%
2013 820,664,621 (-) 55.3%
2012 1,835,617,727 (-) 53.3%
2011 3,927,956,666 4.8%
2010 3,748,861,401 20.8%
2009 3,102,891,777 8.3%

Joint Ventures

KRX expanded its position in the international derivatives market through partnerships with Eurex and the CME Group, to distribute and allow trading in options and futures respectively on its benchmark KRX KOSPI 200 stock index.

In November 2009 KRX launched a joint agreement with Chicago-based CME Group to provide after-hours electronic trading access to KOSPI 200 Futures contracts via the CME Globex platform.[15] KRX and the CME also agreed on a bi-directional order-routing system similar to that successfully implemented between the CME and BM&FBOVESPA, Brazil's largest securities-trading exchange. CME also offers members trading the Kospi futures a give-up/take-up functionality, which allows member firms to transfer positions to one another on an intra-day basis.

In August 2010, KRX began listing its Kospi 200 options contract, also during non-Korean market hours, on Eurex. The partnership allows Eurex members to trade and clear Kospi 200 options during European and North American trading hours. The Eurex Kospi product is a daily futures contract based on the Kospi 200 options. These futures contracts expire at the end of each trading day and open positions are transferred to KRX in the form of a Kospi option.[16] [17]

John Lothian News Interview

Korea Exchange’s Jae-Joon Lim Discusses OTC Clearing and Kospi Contracts
Jae-Joon Lim is director, business development at Korea Exchange, home of the most traded contract in the world, the Kospi futures and options. At the 2012 Emerging Manager Forum in London, Lim discussed the Kospi, as well as OTC clearing of Korean yun denominated interest rate swaps, due to launch this fall. Interview by John Lothian News editor-in-chief Jim Kharouf. Published July 25, 2012. Watch at JohnLothianNews.com[18]

Key contracts

The following contracts listed on KRX have MarketsWiki entries:

There are no restrictions on foreign individuals trading contracts listed on the KRX.


References

  1. KRX Futures Summary. KRX.
  2. FI 2012 Volume Survey. FIA.
  3. FIA Volume Survey 2016. FIA.
  4. Global exchanges line up for KRX stake. The Financial Times.
  5. Korea Exchange to be released from direct state control. The Korea Herald.
  6. Korea Exchange delisted as public institution. Korea Times.
  7. KRX 2006 Business Report. KRX.
  8. 2009 Annual Volume Survey. FIA magazine.
  9. Trading Error Leaves Korean Broker Scrambling. WSJ Asia.
  10. FI 2012 Volume Survey. FIA.
  11. New Start for Seoul Bourse. Business Korea.
  12. KRX exporting Korean stock market. Korea Times.
  13. S. Korea to help set up stock exchange in Laos. China Post.
  14. KRX exporting Korean stock market. Korea Times.
  15. CME Group, KRX Announce After-hours Access to KOSPI 200 Futures on CME Globex. CME Group.
  16. Korea Exchange and Eurex Receive Strong Support from Major Market Participants for Their Link. Deutsche Borse Group.
  17. Korea Exchange and Eurex Receive Strong Support from Major Market Participants for Their Link. Deutsche Borse Group.
  18. Korea Exchange’s Jae-Joon Lim Discusses OTC Clearing and Kospi Contracts. John Lothian News.