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3-Year KTB Futures Success Factors & Outlook

3-Year KTB Futures Success Factors & Outlook. 2003 Taipei Interest Rate Futures Conference November 20-21, 2003. Jungho Kang, Ph.D Korea Futures Exchange. <Average Daily Trading Volume>. (in 1,000 contracts). 11,691. 12,000. 10,000. 7,920. 8,000. 6,000. 3,521. 4,000. 2,000. 898.

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3-Year KTB Futures Success Factors & Outlook

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  1. 3-Year KTB Futures Success Factors & Outlook 2003 Taipei Interest Rate Futures Conference November 20-21, 2003 Jungho Kang, Ph.D Korea Futures Exchange

  2. <Average Daily Trading Volume> (in 1,000 contracts) 11,691 12,000 10,000 7,920 8,000 6,000 3,521 4,000 2,000 898 395 171 3 43 0 Jan~Oct. 2003 1996 1997 1998 1999 2000 2001 2002 I. Market Overview- Growth 3

  3. I. Market Overview – Key Products (in 1,000 contracts) (Figures: Jan.~ Oct. 2003) 4

  4. II. 3-Year KTB Futures – Volume Growth (in contract) 5

  5. II. 3-Year KTB Futures – Global Status <Top 10 Treasury Bond Futures Contracts> (in 1,000 contract) 6 (Source: FIA, January~June 2003)

  6. <2000> <Jan~Oct 2003> Foreigners 2.0 Foreigners 8.1 Individuals 21.1 Individuals 6.1 Institutions 76.9 Institutions 85.8 II. 3-Year KTB Futures – Users (I) ( in %) 7

  7. II. 3-Year KTB Futures – Users(II) <Market User Breakdown> (in %) 8

  8. II. 3-Year KTB Futures - Specification 9

  9. III. Underlying Market - Overview • Various government measures to promote the government bond market → considerable rise in KTB trading volume over the past few years • Improved liquidity → simplified the types of government bonds and focused on KTBs • Screen-based, electronic trading market for government bonds(IDB, October 2002) → steep increase in exchange-traded volume 10

  10. III. Underlying Market - Primary <KTB Issue> (in trillion won) (1) (2) • (Source: Ministry of Finance and Economy) • The government stopped issuing 1-year KTBs as part of measures to lengthen maturities of government bonds. • The January-October volume plus the planned issue amount 11

  11. III. Underlying Market- Secondary <KTB Trading Volume> (in trillion won) * Source: Korea Securities Dealers Association(KSDA), Korea Stock Exchange(KSE), Korea Securities Computer Corp. 12

  12. IV. Key Features – Cash Settlement <Background> • Low liquidity → price manipulation such as “short squeeze”. • The government plan to balance the budget(1999) → future liquidity concerns • Monthly issue → disperses liquidity • Oligopolistic secondary market → market manipulation(a few ITCs and banks have significant market control) • Irregular issuing practices(1999) → predictability issues 13

  13. IV. Key Features – Basket System <Background> • Basket system was adopted to come up with fair final settlement yield. • Final settlement price is determined, based on the average yield of a basket of selected treasury bonds. • KOFEX designates a basket comprising a single or multiple number of bonds prior to the listing of a new contract and the basket remains fixed until the expiry date of the contract. 14

  14. IV. Key Features – Final Settlement Price(I) <Final Settlement Price Calculation Process> Primary Dealer KOFEX KSDA Primary Dealer Primary Dealer * Korea Securities Dealers’ Association 19 primary dealers quote yields of the component bonds in the basket at 10:00, 10:30, 11:00, 11:30 AM. Excluding the highest and the lowest five quotes, KSDA calculates the simple average yield for each bond at each fixing time. ① mid value of the first three fixing values at 10:00, 10:30, 11:00 AM ② average value of ① + fixing value at 11:30 AM ③ average yield(②) → final settlement price 15

  15. IV. Key Features – Final Settlement Price(II) Series Name : KTB312 Last Trading Day: Dec.16 2003 Average Yield: 6.402% Settlement Price: 104.33 (3) (1) Average (2) • Of the 19 quotes received for a bond, the top and bottom five quotes are excluded and the remaining 9 quotes are averaged. • mid value of the first three fixing values at 10:00, 10:30, and 11:00 AM • The final settlement yield = average of the mid value(2) and the fixing value at 11:30 AM. Rounded up to three decimal points. 16

  16. V. Success Factors - Product Design √ Cash settlement→ reduces possibility of market manipulation such as short squeeze and provides easy market access √ Specification→designed to best reflect the underlying market conditions and to meet the needs of market users - contract size: 100 million won(face value of KTBs) - underlying asset: 3-year KTB → in tandem with the shift of the benchmark to 3-year KTBs from 3-year corporate bonds 17

  17. V. Success Factors – Market Conditions √ Increased bond issue→ increased liquidity - issue amount: 6.8 trillion won in 1997 →34.6 trillion won in 2002 √ Low interest rate trend from H2 2001 → rally in bond market √ Flight to quality→ risk-free treasury bonds in high demand due to unstable financial market conditions √ Fungible issue → increase liquidity of underlying bonds(more efficient price discovery: easier to find fair value of underlying bonds) 18

  18. V. Success Factors – Government Actions √ The government increased bond issue and began to issue bonds regularly → enhanced market predictability √ Primary Dealer System(July 1999) √ Marking-to-Market System(July 2000) → increased hedging demand √ Screen-based secondary bond market(IDB)(October 2002) → greatly increased exchange-traded volume & market transparency 19

  19. VI. Outlook √ Good growth potential: Korea’s government bond market is still at an early stage of development. - Increased awareness of risk management → potential hedging demand - The government’s commitment to foster the bond market √Synergies with other interest rate products √Foreign participation is anticipated to increase once the Korean government bond is designated as “exempted securities” (plan) 20

  20. Thank you 21

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