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Korean Rates Swaps Surge

Interest-rate trading has jumped in recent weeks in Korea as newer participants including securities houses and hedge funds ramp up activity. "This will be an amazing year," said a marketing head at a bulge bracket house, tipping volumes in the pure-won swap market to more than double last year's approximate USD400 million notional. The growing liquidity has seen bid-offer spreads on won swaps move in significantly. For instance last year 10-year swaps had a bid-offer spread around five to six basis points, which has now shrunk to one to two basis points.

Fixed income officials said interest rate swap trading is up by over 30% compared to a flat 2005, on the back of improving economic prospects and growing interest from overseas hedge funds as well as domestic institutional investors looking for higher yields. Traders said hedge funds have actively been playing the swap curve between different maturities.

Securities houses including Merrill Lynch, Lehman Brothers and Morgan Stanley started building up trading desks last year to take on traditional banks and are beginning to make their present felt in the market, said officials. The marketing head said securities houses now hold about half the market for longer-maturity swap trades, typically from five years out. Goldman Sachs is expected to enter the onshore market by mid-year, noted market officials, as the firm is awaiting a branch license following an application late last year (DW, 10/21).

Also driving growth is demand for structured notes such as range accruals by retail and institutional investors including insurers, which are willing to take on more complex risk as they search for higher yields. "It's been a very busy start," said S.B. Hwang, head of corporate sales and structuring at Citigroup in Seoul.


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