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Korean & Taiwan Equity Pros Expect Volumes To Rocket With Reg Changes

Derivatives professionals expect the equity derivatives markets in Korea and Taiwan to take off in the coming months on the back of regulators loosening restrictions on foreign institutions shorting stock in Taipei and anticipated changes in Seoul. Taiwan legalized borrowing shares for hedging late last month, with further changes expected early next year, and Korea will likely increase the amount foreign institutions can short.

Chi-won Yoon, managing director in equity risk management at UBS in Hong Kong, estimated the move could boost Korea's already hot derivatives market by 30-40%. The Korea Stock Exchange prides itself on having higher derivatives ticket volumes than any other single derivatives exchange in the world. This level of activity would aid the development of an over-the-counter market. "There's still a lot of potential in Korea," said Julien Bahurel, senior sales manager in equity derivatives at Credit Lyonnais in Hong Kong.

The regulation change is also expected to usher in more exotic derivatives products and strategies, such as reverse convertibles and long/short equity, noted Yoon.

Current restrictions in Korea limit foreign institutions to borrow up to KRW5 billion (USD4.2 million) of shares, with annualized lending costs of around 7-8%. This limit hinders the amount of hedging derivatives houses can do and therefore limits the products they can offer.

Equity officials said Korea's Ministry of Finance and Economy is discussing measures to increase this limit by around four times. J.S. Kim, director of the foreign exchange and external debt division at the MOFE in Seoul, declined comment.

In Taiwan, the first steps have been taken and the regulator is looking at what else needs to be done.

Evelyn Hwang, section chief of the international affairs division at the Securities and Futures Commission in Taipei, told DW, "We're reviewing requirements for qualified foreign investors to increase the attractiveness of the market." The regulator is taking measures "step by step," added Hwang, declining to comment on a timeframe for further deregulation. "It's certainly a positive development," said a trader at a bulge bracket house, adding, "While the conditions need to be clarified, this will definitely boost activity."

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