Will KRX give eyetooth for MSCI listing? Unlikely

By Kim Da-ye

When global index provider MSCI decided not to upgrade Korea’s emerging market status, citing the difficulty in the Korean won’s convertibility, industry insiders sensed that the issue involved more than market accessibility but a tug of war between MSCI and the Korea Exchange (KRX) over the use of stock market data.

The KRX collects real-time stock market data and may provide it to other institutions that calculate their own indexes based on the information. But the stock market operator does not allow them to use the data commercially by, for instance, creating and listing derivatives linked to the indexes.

MSCI has criticized such restrictions, saying that monopolies should not “abuse their position by imposing anti-competitive clauses in their provision of stock market data” in its 2011 Annual Market Classification Review. It officially said in a press release that the restriction was one of the factors for keeping Korea’s status.

The KRX, however, has little reason to succumb to the pressure. Korea’s derivatives market is the world’s largest with 17 million derivatives contracts worth 64 billion won traded every business day at the KRX. A large portion of the contracts are options linked to the KOSPI 200 index, the most popular securities among their kinds globally.

The Seoul bourse listed those derivatives and generates a good amount of revenue from them. Once other institutions are allowed to use the Korean stock market data to create similar products, the KRX is likely to see much investment into those products flowing out. About one third of the investors for those derivatives are foreigners.

With the Korean won not fully convertible, investment could shift from the KRX to bourses in financial hubs that deal with U.S. dollars or other popular currencies.

One’s misfortune could be another’s fortune. If MSCI is allowed to use KRX data freely, it will be able to create indices and license them for profit to third parties that would create their own financial products. The popularity of those products is nearly guaranteed, judging by that of the KOSPI 200 option contracts.

An industry source said that restricting the use of the stock market data has less to do with the Korean market’s accessibility but more to do with MSCI’s commercial interests.

“MSCI has been pressing the KRX for a while. It didn’t work, and MSCI is now trying this way, publicly,” the source said.

But will removing the restrictions benefit Korean investors? The answer is “unlikely.”

Firstly, investments into index-linked derivatives similar to KOSPI 200 options do not always lead to capital flowing into the spot market. Buying index-linked option contracts is ultimately an act of betting on the rise and fall of the index.

Secondly, remaining in the emerging market category isn’t too bad after all.

Institutional investors tend to invest a set portion of their assets allocated for each market depending on which category the market belongs to and where it is located.

A KRX official said that Korea is among the leading markets in the emerging market class and will be a minor economy in the upper category if it becomes reclassified as a developed market.

As much capital is currently flowing into emerging markets amid the sluggish recovery of the developed markets, remaining an emerging market could be an advantage for Korea.

Furthermore, Korea is already regarded as a developed market by many other index providers including Standard and Poor’s and Dow Jones.

Another source said that some institutional investors whose portfolios are based on MSCI’s indices are pressing MSCI to upgrade Korea’s status, so that they can expand their investment into Korea.

For foreign investors, it is a different story.

In markets that not only use more convertible currencies, but also readily provide information in English and have fewer barriers than the KRX, investors will be able to buy financial products similar to the highly popular KOSPI 200 options without risks such as the fluctuating value of the Korean won and with more information available.