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Derivatives

Securities Houses Prep Korean Market Blitz

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Securities heavyweights Goldman Sachs and Lehman Brothers are planning to enter the onshore Korean derivatives market in the coming months.

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Securities heavyweights Goldman Sachs and Lehman Brothers are planning to enter the onshore Korean derivatives market in the coming months. The move comes hot on the heels of Merrill Lynch getting the first derivatives license for an overseas securities house to trade derivatives onshore (DW, 6/21). "With Merrill getting the first license I think there's pressure to speed up the application process," said a fixed income head at a rival firm in Seoul. In addition, Lehman plans to lock-up some USD250 million to secure a full-service license.

Both Goldman and Lehman have brought in market veterans in recent months to supercharge their buildup in the offshore market for Korea and then establish onshore operations. Lehman recruited J.S. Kim, head of trading at Citigroup in Seoul, as a senior v.p. in fixed income in Tokyo (DW, 3/14). Meanwhile, D.K. Shin, head of debt capital markets at Deutsche Bank in Seoul, recently joined Goldman in Hong Kong as a managing director in capital markets. He declined comment on the firm's plans.

"This market is really booming," said Kim, noting that Lehman is now preparing to submit its application for licensing and hopes to begin trading by December. Kim will relocate to Seoul next month to ready the onshore desk, for which he will transfer staff from Hong Kong and Tokyo.

Lehman is aiming to get a full derivatives license, which requires KRW300 billion (USD258 million) of reverses to be set aside against potential losses instead of the KRW100 billion that Merrill had to ring-fence for its foreign exchange derivative license. The additional capital commitment will allow Lehman to offer equity derivatives and won interest rate products in addition to the won-cross fixed income derivatives that Merrill can trade. "I believe that pure won rate products have the biggest potential," said Kim. Traditional banks, such as Citigroup, Deutsche Bank, HSBC, JPMorgan and UBS are already offering these products in Korea under their banking licenses.

Meanwhile, Morgan Stanley is waiting on the sidelines, but is in internal discussions about applying for a license. "We're still discussing what type of license will best fit our firm," said an official. He added that it will likely make the decision next year.

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