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Growing the Warrants Market


clock03-29-2010, 12:34 AM
Yorum: #1
ANALYSIS-Global banks bet on S. Korea warrant market growth



SEOUL, March 3 (Reuters) - International banks are hiking their investments in South Korea's covered warrants market, betting demand for the often risky asset class can rise towards levels seen in regional and global leader Hong Kong.



Citigroup and Macquarie are among the players stepping up their issuance of these products -- which give the holder the right but not the obligation to buy or sell an underlying asset such as a stock at a set price.



The banks hope that a greater range of products will fuel interest and increase participation, particularly from institutional and overseas investors looking to circumvent foreign ownership caps on certain blue chip stocks in Asia's fourth-largest economy.



But some market watchers warn that with many local investors burned by the recent spike in volatility, growth will suffer. And they say increased competition could also squeeze profitability, a possibility the banks seem prepared to live with.



"We are not worried much about margins," said Jay Hwang, a vice president of Citigroup Global Markets' equity derivatives team. "We think the market will grow substantially and will focus on growing the pie through competition."



South Korea, which is rolling out market reforms in hopes of becoming a regional financial hub to compete with the likes of Hong Kong and Singapore, introduced covered warrants in late 2005.



It is already the world's fourth largest market for the security with turnover of $73 billion in 2007, trailing only Hong Kong, Germany and Italy.



Citigroup entered the South Korean market in February with the launch of warrants based on Hyundai Heavy Industries , POSCO and the KOSPI 200 index <.KS200>.



With its entry, Citigroup joins foreign banks including Lehman Brothers Credit Suisse , and Merrill Lynch as liquidity providers, which help make a market through the delivery of bid and offer prices.



An official at the Financial Supervisory Commission said other foreign firms were lining up for a licence to enter the warrants business. One industry source cited Deutsche Bank as one of them.



"Foreign banks seem to believe they have the advantage over domestic houses with operational know-how and systems set up with long histories," noted a warrants sales manager at Korea Investment & Securities, who asked not to be identified in line with company policy.



"They can spend less in setting up the business in South Korea than domestic rivals because they have already introduced those systems in other countries."



HOPES FOR GROWTH



Covered warrants, also known as derivative or equity-linked warrants, are issued by financial institutions and give the holder the right to buy or sell an underlying asset on fixed terms linked to an underlying stock or index.



Bankers said the South Korean market still has plenty of growth potential, considering that warrants turnover represents just 3-4 percent of total stock transactions, compared with more than 20 percent for Hong Kong during many sessions.



A key reason for their popularity is low cost. A call warrant on Samsung Electronics trades at less than 1,000 won per share ($1.06), a fraction of the stock price of 566,000 won.



The risk is that buyers can lose their entire investment if the warrant expires out of the money.



Total turnover in South Korea's listed warrants jumped 51 percent last year from a year ago, versus a 165 percent jump in Hong Kong and a 114 percent surge in Singapore in the period.



"With the right education by issuers and understanding by investors, coupled with appropriate regulations, the equity-linked warrant market has the potential to double in size over the next year and again the year after," said Ross Gregory, head of Macquarie Capital Securities' Equity Markets Group in South Korea.



Indeed, Hong Kong's enthusiastic retail investment culture, fuelled by newspaper, radio and television warrant promotions, is often cited as the reason for it No. 1 standing.



Banks hope overseas investors will also be attracted to South Korean warrants as a proxy for blue chips such as SK Telecom , where foreign ownership is limited to 49 percent.



STARTING TO STALL



But investment by foreign players is far from a one-way bet.



The volume of warrants trading has fallen as South Korea's multi-year bull market stalled, as most investors favour call warrants which can only benefit from rising prices.



"Individual investors do not want to buy warrants in the current market situation," said a trader at a domestic brokerage who did not want to be identified because he was not authorized to speak to media.



According to Financial Supervisory Service data, domestic brokerage houses posted a combined 55.4 billion won loss from equity-linked warrant trading between April and August last year, while foreign houses logged a 1 billion won loss. These warrant issuers failed to hedge adequately against markets moving against them as the benchmark KOSPI <.KS11> jumped 29 percent.



Still, much like the risk-hungry retail investors they serve, executives with the international banks remain optimists.



"We have just started to scale up warrant operations in Asia ... we see continuing growth," said Harold Kim, managing director of Citigroup Global Markets Asia.



(US$=937.1 won)
clock07-07-2012, 05:57 PM
Yorum: #2
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