1. Change of Settlement Method for Equity Options
While KOSPI 200 index products are the most liquid products in the world, the equity options market has been suffering from low liquidity due to the inconveniences caused by the previous settlement method (‘physical delivery’). Under the physical delivery method, the amount to be settled becomes large when the option is exercised, and obtaining underlying stocks to be delivered is not easy since the business of borrowing or lending underlying stocks is not active yet, and furthermore, securities transaction tax is levied when the stocks are delivered.
To revitalize the equity options market, KRX changes the final settlement method to ‘Cash Settlement’. All existing series of physical delivery will be de-listed en bloc, and all cash settlement series will be listed simultaneously (effective on Sept. 26, 2005).
Such change is expected to enhance the liquidity of the equity options market. Investors don’t need to obtain underlying stocks and to pay the securities transaction tax when exercising the options. They will be able to hedge their risks more efficiently.
2. Addition of Underlying Stocks for the Equity Options
Because the number of underlying stocks for equity options trading was limited to only seven, it was inadequate to meet investors’ diverse demands.
To provide investors with expanded investment opportunities and more precise hedging instruments, KRX augments the number of underlying stocks from 7 to 30 (Attached, underlying stocks augmented are listed). Selection criteria for the underlying stocks are market capitalizations, financial status, etc.
3. Reformations of Ex Post Facto Customer Margin
Qualified institutional investors, who are recognized to have sufficient financial capability to fulfill settlement requirements by the members are allowed to place a customer margin till next business day, which is before 12:00 A.M.(Ex Post Facto Customer Margin).
Existing ex post facto customer margin has been rarely used, owing to some demerits that the ex post facto customer margin is applicable only to KOSPI200 Index products and equity options (not allowed for other product, KTB Futures, etc.), that it is allowed only when documentary evidence for hedging and arbitrage is admitted, that the margin rate is the same as customer margin rate(15%), despite relatively low risk involved in arbitraging or hedging.
KRX now makes the ex post facto customer margin available for all product of futures market and all type of the trades (not only hedging or arbitraging, but also speculative) by qualified institutional investors. In addition, in case of arbitraging or hedging with admitted documentary evidence, the margin rate will be reduced from 15% to 12%.
With differentiated margins based on risk exposure of a trade, the ex post facto margin is expected to be used more frequently and the participation in futures and options market by institutional investors is expected to be more active.
4. Introduction of Block Trades on KTB Futures (3 year maturity)
Before the block trading on the KTB futures (3 year maturity) is introduced, massive trading of the KTB futures usually resulted in abrupt fluctuation of the bond price, and the demand from institutional investors for smooth roll-over of large positions was not met.
By introducing block trading on the KTB Futures, bond price is expected to be more stabilized, and hedging of the KTB will be more efficient.
Click here to view the underlying stocks on which equity options are traded.
