Derivatives Transaction Tax Will Kill Market
The following is the second in a series of interviews with CEOs of financial companies and global consulting firms leading the nation's financial market. ― ED.
By Park Hyong-ki
Staff Reporter
Korea will simply kill its derivatives market when it decides to impose a tax on derivatives
transactions, warned a foreign executive specializing in brokerage of equity-linked warrants (ELW).
``It's quite likely if you have a very onerous tax, of course depending on the size of the tax and how it is applied, you might kill the market,'' Ross Gregory, Korea head of Macquarie Securities Group, said in an interview with The Korea Times.
He added that such taxation will potentially deter a certain trading pattern and investors from the country's derivatives market.
Thus, it will significantly dampen and damage liquidity underlying the derivatives market even more so amid the financial fallout, and the option should not even be considered furthermore, with or without taking into account of global market conditions.
``I mean Korea is at a good stage where it can develop to have the best derivatives market in the region. It is probably premature for Korea to consider taxation at this stage,'' said Gregory.
His remarks come after the Korea Institute of Public Finance recommended the Ministry of Strategy and Finance introduce a derivatives transaction tax in the stock market.
The institute noted that the government should at least consider applying such a tax as it does not impose a capital gains tax on trading of listed shares.
The ministry had indicated that it will look into introducing such tax measures.
Lee Jung-hwan, CEO of the Korea Exchange, argued, ``It will undermine the global competitiveness of Korea's derivatives market.''
However, the regulator and the ministry agreed not to look into it until the stock market recovers from the prolonged bearish run, ignited by the global credit crunch.
The regulator instead indicated that it is considering introducing tax rebates for long-term investors of funds investing in stocks and bonds, as part of efforts to stabilize the market.
Unlike other countries, Korea does not have capital gains tax on listed shares.
But it has a significant tax on securities transactions, which is 30 basis points whenever an investor sells a share, according to Macquarie Securities Korea.
This is as equally high as Taiwan in the region, but countries such as Japan and Australia have abolished such a tax.
``There is already a tax here that is quite significant,'' said Gregory.
He noted that derivatives and shares are slightly different where derivatives are financial products that do not involve the transfer of ownership in securities, therefore the tax principles are not the same.
The Korea head advised that the country review the implications of liquidity and the need of market participants, before even considering imposing additional taxes.
``You can't just go on and put a tax on one financial instrument just because the market doesn't have a tax,'' said Gregory, adding that the country should foresee how it could affect its competitiveness.
He continued to say that it is illogical to apply such a tax as the main purpose of derivatives trading is hedging.
``In Hong Kong, if you are a market maker in exchange traded options, then you get an exemption from tax whenever you trade shares as a hedge for your ETO positions,'' he exemplified.
Gregory said the country should spend a few more years rising to the derivatives forefront, then possibly look at how it can adjust the tax system like other global markets.
Most importantly, he said, ``Korea should ensure fair recognition of profit, continuing liquid health and an equitable transparent market.''
Derivatives Powerhouse
John Walker, chairman of Macquarie Group Korea, had advised that Korea should develop itself as the derivatives destination of Asia, if it wants to become an international financial center.
Korea is currently the world's biggest options market.
The futures market is the fifth-most liquid in the world.
The ELW market is the third biggest, launched in December 2005.
Ross Gregory, Korea head of Macquarie Securities Group, firmly believes Korea's ELW market can overtake the top two markets ― Hong Kong and Germany ― in terms of market penetration and liquidity.
``The Korean market has a good history because it started well from day one. The original rules were very sensible compared with other markets where they had some strange rules in which they treated warrants like capital raising like stocks and bonds,'' he said.
He said rules governing the transparency of the ELW market are much more stringent than that of other markets as equity warrants are complex products.
Macquarie Securities Group called on the regulator to allow the listing of ELWs linked to underlying equities of the Hang Seng China Enterprise Index (HSCEI), which forms the underline for a lot of equity-linked securities and mutual fund products.
``I cant see any reason why the regulator wouldn't allow ELWs linked to the HSCEI given the rules of liquidity provision on ELWs are much stricter than they are than on exchange traded funds,'' said Gregory.
Macquarie said the listing of more offshore index ELWs can further provide opportunities to domestic investors to invest overseas and balance their portfolios.
phk@koreatimes.co.kr
Ross Gregory is Korea head of Macquarie Securities Group. He joined Macquarie Group in 2003 and was heavily involved in the group's successful application for an over-the-counter derivatives license and the subsequent establishment of its ELW program. He also worked for the equity derivatives desk of Woori Bank, with which Macquarie has a business alliance. As a qualified lawyer in Australia, he previously worked in Melbourne for the law firm Mallesons and Freehills, and for Clifford Chance in Hong Kong, specializing in regulatory and commercial law. He also taught business law at Melbourne University. Gregory graduated from Melbourne University with a master's degree in law and a bachelor's degree in science. He later obtained an MBA from Melbourne Business School.