The introduction of product standardisation rules in South Korea has made it easier for market participants to compare newly listed products by conversion ratio, closing date, strike price and underlyings, according to a report by Korea Exchange (KRX) on the state of the equity-linked warrants (ELW) market since the introduction of its market soundness enhancement plan last November.
“Among a total of 308 newly listed ELWs, 239 are comparable; the average daily transaction volume per product has increased by 108% compared with the previous year to reach KRW4.3m ($3,971); and also the closing deal ratio was up by 19% year-on-year,” stated KRX in the report.
The exchange delisted a total of 134 ELWs with poor trading records. “Local securities firms avoid listing out-of-money ELWs which will be subject to possible de-listing due to poor trading records,” stated the report. “Therefore, the ELW issuance by local securities firms has decreased by 42% from 532 ELWs issued in 2013 to 308 ELWs in 2014.”
Following the introduction of KRX’s market enhancement plan, the issuance of ELWs with higher parity (ratio of underlying price to option strike price), in the range of 90% to 100%, rocketed to 93% which has increased the possibilities for trading call and put options. “We expect that local investors will be less exposed to potential loss of their capital,” stated KRX. “Furthermore, by abolishing the lower bound limit during issuance, the price gap between similar ELWs has largely reduced and most of them are issued based on the real price.”
The exchange plans to further develop and promote the ELW market by providing guidance to investors on ways to compare ELWs on the basis of their underlyings and other product features. The new policy guidelines are expected to encourage healthy competition among issuers while increasing the transparency of the market and strengthening investor protection.
KRX acknowledged there is a market need for recovery considering that trading and issuance activity has decreased and a number of securities firms have stopped issuance altogether. “We will try to continue promoting healthy development of the market,” it wrote.
The South Korean ELW market continues to fall in size as a result of regulation promulgated to curb what regulators see as a speculative market. The average daily transaction volume in 2014 was KRW81bn ($74m), down by 94% from 2011. The number of ELWs listed as of January 2015 was 2,228, which represents a fall of 61% compared with 2011. The number of securities firms active in the Korean ELW market in 2014 was down to six firms, compared with 11 firms in 2013 and 27 in 2011.
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