By Jang Jae-young
Head of Fixed Income, Currencies and Commodities for Korea, Societe Generale Corporate & Investment Banking
Korean investors, both institutional and private, have become increasingly sophisticated in recent years. Concurrently, Korea's financial industry is providing easier means of accessing the market and a broader of array of investment options, creating a virtuous cycle that drives demand for new and innovative products tailor made to meet the requirements of Korean investors.
Korea's financial sector has been blooming rapidly in recent years, clearly there is incredible potential and latent market demand for traditional ``vanilla'' interest rate and foreign exchange products, as well as more sophisticated credit and commodity-related products. Among emerging Asian countries, Korea is already the most important market for Societe Generale Corporate & Investment Banking (SG CIB) as well as other investment banks for credit and commodity derivatives.
The ability of banks to successfully identify and develop these products will be a critical step in the continued evolution of Korea's financial market and in establishing Korea as a major financial center in Asia.
International investment banks have been stepping up their business expansion in Korea in line with the government's push to grow the nation's financial market.
Concurrent with the gradual opening of the derivatives market in Korea to foreign banks, the depth and breadth of the investment products is on the right path to effectively compete with other regional financial centers.
Specifically, there are three ways that international banks can contribute to the development of Korea's derivatives market.
First, by harnessing their global platforms and deep structuring capabilities, international banks have been introducing innovative structured products to both institutional and retail investors.
For instance, SG CIB was among the first batch of international banks to provide Korean Won Quanto derivatives structures to financial institutions and investors. Such structures give the opportunity to Korean investors the opportunity to take advantage of the higher U.S. dollar return, while hedging the FX risk.
The demand for credit derivatives products from lenders will grow fast with the introduction of the Basel II in 2008 and Korea's Financial Supervisory Commission has been working on measures to create an active market for credit derivatives trading as part of a measure to nurture the derivatives market in Korea.
Besides, SG CIB, which was ranked No. 1 in interest rate derivatives activities in Korea by Greenwich Associates in 2007, has been a pioneer in providing different structures of Korean Won interest rate derivatives exotic products, like the Korean Won power spread and skyline to Korean investors and issuers. On the commodity derivatives front, SG CIB is planning to introduce European carbon emission structures to Korean investors, allowing them to capture on the rising cycle of this underlying to enhance return. SG CIB has been named the Energy/Commodity Derivatives House of the Year by Asia Risk, Derivatives House of the Year, Asia by Energy Risk as well as Best Commodity Derivatives Provider, Asia by Global Finance in 2007.
In addition, SG CIB is looking to boost its presence in Korea on the securities side, especially on equity derivatives. Again, SG CIB is a global leader in this product area, winning the Best Equity Derivatives Provider: Europe, Asia by Global Finance in 2007 as well as Wealth Management House of the Year by Asia Risk in 2006. With the new Capital Markets law, SG CIB aims to be at the forefront of the exciting developments in these markets over the next few years. Through these business developments on both securities and bank operations, SG CIB will be well positioned to offer a fully rounded service to clients across all asset classes and derivative products.
Second, there is an increasing trend of joint ventures and business partnerships between domestic and international banks in Korea, e.g. IBKSG Asset Management Co., a 50:50 joint venture with Societe Generale & Industrial Bank of Korea, Shinhan & BNP's joint venture as well as the commodity derivatives partnership between SG CIB and Kookmin Bank etc, as a way to speed up exchanges of experience and to achieve win-win solutions by leveraging the competitive advantages of both parties.
SG CIB entered into a service agreement with Kookmin Bank in December 2006. This was the first partnership in the commodity derivatives business between a Korean bank and an international bank, and was established to take advantage of the continued increase in commodity prices resulting from the rapid economic growth of China and India. Korean companies were well aware that managing the risk of increasing raw materials prices was essential, but most of them were not properly hedging the risk of price fluctuation of raw materials due to lack of knowledge.
Kookmin Bank and SG CIB saw an opportunity to cooperate, contribute significantly to the development of the commodity derivatives' markets in Korea, and to provide a valuable solution to Korea's import-dependant manufacturing sector. This kind of win-win business partnership between local and international banks will continue to prosper as Korea's financial market moves toward increasing internationalization.
Finally, as international banks have expanded their operations and offerings in Korea, many have exerted substantial effort to enhance Korean institutional and individual investors' knowledge of derivatives, by sponsoring or participating in industry forums, writing articles and contributing their opinions to newspapers and trade publications, or by meeting with clients face-to-face to explain the various products and their uses. The process is deliberate and the progress is steady, which bodes well for the future of the market.
Given Korea's position as Asia's third largest economy and its history of innovation and adaptation, one should not underestimate the growth momentum of Korea and the tremendous potential of its derivatives markets. The combination of governmental support and cooperation and healthy competition between international and domestic financial institutions has already help lay a solid foundation. The challenge and the opportunity are for market participants to build on this foundation, and take Korea's financial sector to new heights.