Investment trust corporations (ITCs) in Korea are expected to jump into the country's interest-rate swap market soon, after getting the green light to transact April 24 from the Financial Supervisory Service (FSS), according to swappers and asset managers in Seoul. Traders said ITCs, some of which have up to KRW5 trillion (USD3.8 billion) in bond portfolios, will start using swaps as early as next month. Market officials said although Korean insurance companies and local banks already use the OTC swap market, the regulator had previously barred ITCs because of their lower credit ratings.
Among ITCs lining up to take the plunge areKorea Investment Trust Corp., which had KRW16.7 billion in total assets in 1999, and Hyundai ITC, said officials at the companies. Kiwang Jeong, general manager of the overseas investment team at Korea ITC, expressed interest in using swaps to gain floating rate exposure on its fixed coupon bond portfolio.
M.S. Shin, fund products developer at Hyundai ITC, is also considering the move, adding that the use of interest-rate derivatives would help create demand for longer term bonds, and entice more foreign investors to enter the Korean bond market.
UBS Warburg is among foreign banks that are pitching swaps to Korea's investment trust corporations, according to Mun Souk Choi, director in Seoul. He predicts strong demand from ITCs because swaps are a better hedge for managing interest rate exposure on bond portfolios than futures, which are currently used by some ITCs. However, the change in regulation may not result in an immediate free-for-all: an official at the FSS said ITCs would need approval from the regulator for each interest-rate swap transaction.
