Banking & Securities | January 14, 2011
SYSTEM ENHANCEMENT PROPOSAL TO PREVENT DRAMATIC
MARKET MOVEMENT ON OPTION EXPIRY
On January 11, 2011, the Financial Services Commission ("FSC"), Financial Supervisory Service
("FSS"), Korea Exchange ("KRX") and Korea Financial Investment Association ("KOFIA") issued a joint
press release announcing the system enhancement plan proposal prepared by the FSC (the
"Enhancement Proposal") to prevent the reoccurrence of drastic market movement similar to the
incident on November 11, 2010. The major points of the Enhancement Proposal are summarized
below. The press release states that the plan is to implement a large portion of the Enhancement
Proposal by amending the relevant KRX regulations in January. However, we understand that the
relevant agencies, including the FSC, FSS, KRX and KOFIA, are currently reviewing the Enhancement
Proposal and the actual scope of the Enhancement Proposal that will be implemented remains to be
decided.
1. Post-Trading Margin System
Under the current regulations, a KRX member has the discretion to determine which qualified
institutional investor will be subject to the post-trading margin requirement and, in practice, almost
all qualified institutional investors have been designated as being subject to the post-trading margin
requirement. The Enhancement Proposal imposes pre-trading margin requirement on qualified
institutional investors with total assets of less than KRW 500 billion or financial investment
companies that have less than KRW 1 trillion of collective investment assets under management,
subject to an exception that if the risk management department of a KRX member determines that
there will be no settlement risk arising from requiring post-trading deposit, post-margin may be
allowed.
2. Daily Order Volume Limit
Currently, the limit of orders placed by customers can be determined by the KRX members at their
discretion. The Enhancement Proposal contemplates a best practice guideline to be prepared by
KOFIA and the daily order volume limit for each customer will be established pursuant to this
guideline. KRX members are to consider total assets, amount of assets under management, credit
rating and financial condition of the customer in determining its daily order volume limit and
institutional investors subject to the post-trading margin requirement will be permitted to trade in an
amount up to 10 times their margins within its daily order volume limit.
3. Random End System
The current regulations state that the closing auction period will be extended by up to 5 minutes if
the difference between the highest (lowest) expected execution price and the expected closing price
for a particular stock during the last 5 minutes prior to market close (i.e. 14:55~15:00) amounts to
±5%. Under the Enhancement Proposal, the closing auction period will be extended by up to 5
minutes if the expected closing price is ±3% or more of the immediately preceding price (14:50). No
revision to the random end system for the opening of the market is being considered.
4. Program Trading
Under the current regulations, it is not possible to engage in program trading after the prenotification deadline (14:45) on expiry dates. Under the Enhancement Proposal, if the amount of
sell (buy) order exceeds 75% of the amount of buy (sell) order reported by the pre-notification
deadline (i.e., 14:45) and the difference between buy and sell orders is larger than KRW 500 billion,
additional price quotation to eliminate the difference between the two sides will be permitted, subject
to the caveat that the bid quotation may not exceed the immediately preceding price and the ask
quotation must be not less than the immediately preceding price in order to prevent the index from
shifting into the opposite direction as a result of the additional program trading.
5. Position (Unsettled Contracts) Limit
The net open position limit (5,000 contracts for individuals and 7,500 contracts for institutions)
applies only to speculative trading of KOSPI200 futures. The Enhancement Proposal imposes the
position limit with respect to KOSPI200 option trades and hedging and arbitrage trades of KOSPI200
futures as well. On expiry dates, the aggregate number of futures and options contracts (whether
speculative, hedging or arbitrage trade) will be limited to a maximum of 10,000 contracts for
institutions (equivalent to KRW 1.3 trillion in terms of cash position). The current limit of 5,000
contracts will be maintained for individual investors. On any other date, the position limit for
unsettled contracts will be 10,000 contracts but will only be applicable to speculative trades of
futures or options.
6. Reporting Requirement
Under the FSCMA, the requirement to report large holding and changes in holding is applicable only to
certain commodity futures (gold and lean hogs futures). The Enhancement Proposal requires reporting
of large holding and changes in holding to be applicable to KOSPI200 futures and options as well.
If you have any questions regarding this issue, please contact
Chang Hyeon Ko
chko@kimchang.com
+82-2-3703-1003
Sup Joon Byun
sjbyun@kimchang.com
+82-2-3703-1289
or any of your regular contacts at Kim & Chang.
Seyang Building, 223 Naeja-dong, Jongno-gu, Seoul 110-720, Korea
Tel: +82-2-3703-1114 Fax: +82-2-737-9091~3 www.kimchang.com E-mail: lawkim@kimchang.com
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