South Korea reclassifies ELNs and warrants

South Korea’s Ministry of Finance and Economics (MOFE) has reclassified equity-linked notes (ELNs) and warrants as securities under the country's revised Securities and Exchange Act, according to an official at the MOFE. The move – which came into effect today - permits securities firms authorised to trade over-the-counter derivatives to market such products to the nation’s retail investor base for the first time.

The country’s securities firms have eagerly awaited the reclassification since a change in regulations last July allowed them to apply for OTC derivatives. Six firms have so far obtained licences, including Daewoo Securities, LG Investment and Securities, and Samsung Securities. Previously, the OTC licences limited the firms to marketing derivatives to corporates and selected institutional clients, leaving the potentially lucrative retail base untapped.

Last year, for example, the Korea Stock Exchange’s Kospi 200 options and futures contracts were two of the most actively traded listed derivatives globally. The Kospi 200 options contract grew 131% in terms of average daily trading volumes by October last year. This surge in volumes has commonly been attributed to the participation of retail investors in the regulated derivatives market.

Hong Shik Kim, head of trading and derivatives at Goodmorning Shinhan Securities, which obtained an OTC derivatives licence earlier this month, believes the ELN market could be worth $8.5 billion a year, while this year alone a South Korean warrants market could generate notional volumes worth $5 billion. “I think [the change in regulations] will have a huge impact on the retail investor market,” he said.