Three firms receive OTC derivatives trading licences in South Korea

Three local South Korean securities houses have received licences to trade over-the-counter (OTC) derivatives following regulatory changes that opened up the country's OTC market to securities firms in July.

Samsung Securities, Daewoo Securities and LG Investment and Securities all became authorised to trade OTC derivatives in the last few weeks. However, the firms have been preparing to build up their derivatives capabilities for the last several months, with a series of new hires and establishment of dedicated teams.

Daewoo Securities, which hopes to begin trading in two weeks time, established a seven-strong OTC derivatives trading department in May headed up by Jung Min Lee, while LG Investment and Securities set up a dedicated derivatives product sales team a year ago, headed by JY Choung.

Meanwhile, Samsung Securities recently hired Alex Choi, an ex-Goldman Sachs banker, to lead the firm's efforts as head of its new capital markets division, which will primarily structure equity and fixed income derivatives with foreign exchange derivatives to follow in the near future.

With the interest rate markets in South Korea dominated by banks, the local securities firms have largely chosen to focus on equity derivatives in the initial stages, although many plan to branch out to fixed-income and foreign exchange derivatives at a later date.

"Interest rate related products are already dominated by banks," says one official at a local securities house in Seoul. "In consequence, we deem interest rate related products as secondary in terms of our focus."

An official at the Financial Supervisory Commission (FSC), the local regulatory body, said he expects that two to three foreign securities houses and two to three more domestic houses will apply for a licence by the end of the year.

While only three firms have received licences, the official added that three others had applied but later withdrew their applications. Woori Securities and Tongwon Securities withdrew applications after failing to meet internal risk management control requirements, while Daishin Securities faced unspecified problems relating to its majority shareholder.