Prominent players in Korea's interest rate swap market including Citibank and JPMorgan have cut their prop trading books due to liquidity plummeting in recent months. Market officials attributed the move to mark-to-market losses caused by the widening of cross-currency swap spreads in March (DW, 3/16) as well as tough domestic economic conditions which have forced banks to reduce their exposure to Korea. Daily interest rate swap volumes have fallen by 50% from a high of USD350 million a day six months ago, according to one head of derivatives in the region.
The recent collapse of SK Global, the trading arm of Korea's third largest conglomerate, and uncertainty surrounding credit card companies due to skyrocketing default rates has damaged the end user market. "It's a double whammy," said one marketing head at a foreign house. Indeed, major insurance companies such as Samsung Life Insurance and Kyobo Life Insurance have steered away from additional investments due to the lack of liquidity in the swap market.
"Credit card companies were the largest issuers of structured bonds last year--they created the boom in the swap market but now it's dried up," said one trader. "The current situation makes it much more difficult for card companies to issue," said Kim Jae Hyun, head of finance for debt related transactions at LG Card in Seoul, which is one of Korea's largest credit card companies.
