ELW Trading to Be More Transparent

Securities Firms Face Evaluation Over Contribution to Market

By Park Hyong-ki

Staff Reporter

From next year, the Korea Exchange (KRX) will announce the results of its evaluation of securities companies for their contribution to the trading of equity-linked warrants (ELW), a move to further vitalize the ELW market.

How actively brokerage firms mediated between traders for more active transactions of ELWs will also be evaluated by the KRX.

``We are going to revise rules and put these new ELW regulations into practice from next year,'' the Financial Securities Commission said.

An ELW is an option that gives the holder the right but not the obligation to buy or sell an underlying asset at a set price, on or before an expiry date. Investors will buy a warrant at cheaper prices than the share price in the stock market and take profit by exercising the option when the stock price goes up on expiry date. A key benefit of an ELW is that it offers easier access to blue chips.

The ELW market, introduced here in December, 2005, saw the number of listed ELWs reach 1,928 as of the end of last month. The ELW market has grown steadily and its daily turnover reached 280 billion won, the world's fourth largest. Hong Kong has the largest daily turnover of about 2 trillion won, followed by Germany with 1.6 trillion won and Italy with 482 billion won.

Despite the growth, calls for revamping related rules have been growing due to the high portion of short-term traders and investor complaints against inactive liquidity provision by brokerage firms designated as liquidity provider (LP).

Once designated as LP, securities companies are obliged to offer buy and sell orders of ELWs actively at tradable prices for smooth trading among investors. But investors have complained that they have been inactive in offering the orders, falling short of investor expectations.

The new rules call for brokerage firms to report to the KRX and disclose details of the standards by which they calculate buy and sell prices.

Brokerage firms that receive low evaluation ratings and violate the new rules will be penalized, the FSC said.

``We are going to sanction securities companies that do not follow rules on offering buy and sell prices. If their offered prices are found not reasonable, they will also face sanctions,'' an FSC official said at a press briefing.

The FSC said that the rules requiring brokerage firms to make public the standards by which they will set buy and sell orders will help boost transparency of the ELW market.

phk@koreatimes.co.kr