Korea Exchange (KRX) has soft-launched ten exchange-trade notes (ETNs) including eight strategic and two dividend-paying plays issued by six local securities firms in South Korea which will be listed on November 17.
Young Kim, head of the exchange’s marketable securities team told SRP that KRX is conducting an initial screening for these ETNs. “Some [of the ETNs] may not be launched,” he said. “The final decision will be announced in due course and the providers will need to submit registration of securities to the Financial Supervisory Services and the whole process will be finalised on 10 November after they submit the application to list.”
Providers
According to KRX, Daewoo Securities filed the Daewoo Low Volatility ETN – a note linked to local stocks with low volatility; while Shinhan Investment submitted two ETNs - the Shinhan K200 USD Futures Buy&Sell ETN and Shinhan USD K200 Futures Buy&Sell ETN, betting on bullish market movements and currency appreciation. Both strategies are linked to local stock futures and dollar futures.
In contrast, Korea Investment & Securities (KIS) used a covered put strategy for its two registered ETNs – True Smart Kospi Call Option Selling ETN which is based on buying Kospi200 futures and selling call options; and True Smart Kospi Put Selling ETN which buys Kospi200 futures and sells put options.
In addition, Hyundai Securities has disclosed the Able Kospi200 Futures Plus ETN and Able Quant K150 Adjusting ETN, two ETNs linked to local stock futures and corporate bonds; Woori Investment & Securities has rolled out its Octo Big Vol ETN and Octo Wise High Dividend ETN; and Samsung Securities is also hoping to bring to market an ETN linked to higher dividend-paying European stocks.
Chungsung Lee, product manager at Shinhan Investment told SRP that the screening process should not be a big obstacle. “Each provider has been communicating adequately with KRX since the initial stage on which kind of products should be launched,” he said. “This is the reason why the ETNs that were registered have a diverse pool of underlyings.”
Investor protection
Under KRX entry rules, providers will be required to exit the market when they no longer hold an investment dealing license, if their own capital falls below KRW500bn ($469bn) with credit ratings lower than BBB-, or the net-capital-ratio is below 150% for three months or it gets lower than 120%.
Also, if the calculation of the underlying assets is no longer available or the calculation measure changes, and when the issuance volume and trading volume is lower than KRW5bn ($4.7m) and KRW5m ($4,695) respectively for two consecutive quarters, or the liquidity provider cannot provide liquidity for one month due to unqualified eligibility, the ETNs will need to be de-listed and withdrawn.
According to Lee, although ETNs are open to the public, all investors excluding professional investors will need to complete an educational course offered by the Korea Financial Investment Association (Kofia) similar to that provided to equity-linked warrants investors. “From the provider side, we will also carry out education program as appropriate for the local investors,” concluded Lee.
KRX also stated that is planning to introduce ETNs linked to volatility indices similar to iPath S&P500 Vix Short-term Futures ETN and MLP ETN investing into energy related infrastructure as well as commodity ETN investing into crude oil, gold, silver and coffee, similar to iPath Dow Jones-UBS Commodity ETN, as well as ETNs linked to exchange-traded funds.
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