’Markets cannot exist without derivatives’

Woori Investment & Securities CEO Hwang Sung-ho

Woori Investment CEO stresses importance of fostering speculative market

By Kim Jae-kyoung

Following the global financial crisis triggered by the collapse of Lehman Brothers, the global economy faces a myriad of challenges and is undergoing a major transformation.

Among the many changes, what is most outstanding is that the crisis has revamped U.S.-led capitalism to be “more regulated” and “less profitable,” significantly altering the look of global financial markets.

At the center has been the tightening of controls over the trade of derivatives, particularly credit derivatives, such as collateralized debt obligation (CDO), or its equivalents, which many policymakers and economists believe activated the crisis.

In Korea, derivatives trading has been losing growth momentum after major domestic financial groups suffered huge losses from investment in derivatives abroad in the wake of the crisis.

In particular, the latest two incidents — Deutsche Bank’s option scandal and legal conflicts associated with equity-linked warrants (ELW) — put the high-risk, high-return market in the spotlight, resulting in more leeway for local regulators to more strictly control the market.

For many individuals, it seems that the move toward tighter control is a step in the right direction but the head of the nation’s leading securities company recognizes that it may lead to the unwanted outcome of dampening the local capital markets.

In an interview at his office in Yeouido, Seoul, on July 12, Hwang Sung-ho, CEO of Woori Investment & Securities, said that seeking to address excesses with proper regulation is right, but there is also a clear need to ensure that regulations do not constrain the broadening and deepening financial markets, nor the utilization of a range of financial products including derivatives.

Derivatives is a must for market growth

The derivatives market in Hwang’s words is critical to the growth and development of the domestic capital market, which he feels will be helpful for the globalization of the local securities industry.

“In order to foster the capital market, it is essential to develop the derivatives market, not only for stock index futures but also future contracts or options. It is important to let investors make their decisions to seek gains and set market prices,” said Hwang.

“If the government only opens the spot market and closes the derivatives market, no one will buy local shares. In particular, foreign investors, I believe, may sell off their stocks,” he added, noting that foreign holdings here reach around 400 trillion won, over 30 percent of the total market cap of 1,200 trillion won

Derivatives refer to securities whose price are dependent upon or derived from one or more underlying assets, such as stocks, bonds, commodities, currencies, interest rates and market indexes.

Most derivatives are characterized by high leverage. Futures contracts, forward contracts, options and swaps are the most common types of derivatives, which are generally used as an instrument to hedge risk, but can also be used for speculative purposes.

Hwang points out that there is widespread misunderstanding of the derivatives market, which is preventing the market from growing further. He believes that markets cannot exist without derivatives.

“The capital market is not a highly-ethical place. All the participants bet their lives on the future course of prices. Prices do not always go up. Derivatives offer tools for hedging against losses or preparing for the future. In this regard, without derivatives, there is no reason to buy stocks,” he said.

“What is more important is that if the derivatives market dies (due to excess regulations), the spot market will die as well. Are you willing to invest in something that you won’t be able to sell later when you want to do so?”

According to Hwang, regulatory controls should be a balance between growth and acceptable risk and not err on the side of excessive restrictions to eliminate risk from the system which will surely eliminate growth as well.

Becoming global IB

The former CEO of PCA Investment Trust Management believes that the growth of the capital market will ensure that the country will create an environment in which it can employ armies of the world’s best financial talent and work at an international level.

In the eyes of Hwang, Korea has yet to build a culture that will accept, attract, motivate, and stimulate this talent, let alone reward structures that will satisfy them and offer them incentives.

“In order to compete with global investment banks (IBs), there are three key prerequisites. First, you have to secure excellent talent. To that end, you need to have reasonable reward and evaluation systems. Second, you need to create corporate culture that can ensure that such talent fulfills their abilities. Finally, you have to upgrade your systems to support IB business.”

The 58-year-old CEO, who took the helm of Woori Investment in 2009, said that he intends to turn Korea’s leading brokerage house into Asia’s major player, somewhere between the Bank of America (BOA) Merrill Lynch and Goldman Sachs.

“BOA Merrill Lynch has strengths in sales, while Goldman Sachs excels in IB and trading. We are seeking to create a business model, somewhere between the two, with a 50:50 balance in terms of revenue,” he said. “Our portfolio is already similar to what we aim it to be, with 40 percent of our revenue coming from each of asset management and trading, and 20 percent from IB.”

On top of the business portfolio and talent pool, global networking is another critical element to become a global IB, according to Hwang. To that end, the country’s third-largest brokerage by market cap, signed an agreement with China International Capital Corp. (CICC) in late May.

Under the deal, the two parties will cooperate in their IB business to underwrite new M&A and initial public offering (IPO) deals. “The deal is aimed at developing and finding business opportunities in Asia’s largest economy, which is part of our efforts to build a global network,” he said.

Regarding the recent move by private equities to purchase Woori Financial, the chief executive hinted that he is not in favor of the idea. Woori Investment is the securities arm of Woori Financial Group, the nation’s second largest financial group, which is now up for sale for privatization.

“The government has three key principles in Woori privatization. One of them is that it should be in line with the development of the domestic financial market. But private equities are short-term buyout funds seeking to maximize gains.

“They may insist that they can take over Woori Financial and foster it but even if that’s true, we have to realize that they will have to resell sometime in the future. There is a reason why the government has not sold its stake to private equities for a long time. From that perspective, I doubt (whether they are eligible).”