Interest rate derivative volumes in Korea, one of the largest Asian swap markets, have shot up dramatically in recent weeks, a stark contrast to the lulls during most of the year. "We're going to have a busy winter," said S.B. Hwang, head of derivatives marketing at Citigroup in Seoul, noting that volumes have picked up by nearly 40% in the last few weeks. Earlier this summer, the Korean fixed income derivatives market endured a drop in activity due to a lack of liquidity and customer interest as rates remained low, which forced major players to cut back their prop trading books (DW, 6/1). The anticipated interest rate rise means there has been a large increase in demand for hedging products. "This relates to the domestic and world economy picking up--there's expectations of rate increases," noted Kwang Ho Park, deputy general manager at Kookmin Bank in Seoul.
Corporates have been piling into the debt market for financing before the expected rate hike. "There's a lot more issuance in the pipeline," added Citi's Hwang. He continued that as a result, demand for interest rate swaps and cross-currency interest rate products on the back of U.S. dollar funding has increased. For example, an official at Korea Gas Corp. in Seoul noted that the natural gas supplier is speaking with derivatives houses about entering a cross-currency interest rate swap to convert a USD200 million seven-year bond issued two weeks ago into won.
Gin Lee, treasurer at Crédit Agricole Indosuez in Seoul, said that structured products are also back in play. "There's lots of structuring opportunities as companies are looking at ways to reduce funding costs," said Lee, explaining that fixed-rate corporate issuance that embeds option structures, such as callables and range accruals, are returning to the forefront. "Everyone wants to issue bonds ASAP," he added.
