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A Study on Regulations for Unfair Trading in Korea’s Derivatives Market
Research Papers 14-02 Mar. 24, 2014
- Research Topic Capital Markets
- Page 119
Unfair trading is a serious financial crime because it inflicts damage on individual investors and drives sound individual investors away from the capital markets. Although the new government gives priority to eradicating unfair trading practices related to stock price manipulation, unfair trading regulation in the derivatives market still receives little attention.
The crackdown on unfair trading activities grows more difficult as derivatives trading becomes more complicated and sophisticated with the rapid growth of IT technology. Unfair trading cases related to derivatives are likely to cause massive losses to both retail and institutional investors, which could lead to systemic risk. Recently, Korea’s derivatives market experienced some unfair trading events: the price manipulation case in the ELS market, the plunge of the KOSPI200 on the option maturity day, and the allegation of unfair trading by ELW scalpers, just to name a few. All these cases had significant social ramifications.
To minimize these kinds of unfair trading incidents and to protect individual investors from huge losses in the derivatives market, Korean financial authorities strengthened regulations in the exchange-traded derivatives market. For example, the multiplier for the KOSPI200 options was raised from KRW 100,000 won to KRW 500,000 won. Also, strict limitations were placed on liquidity provisions in the ELW market. In addition, the leverage in FX margin trading decreased because the initial margin was increased. A desirable approach to build a fair trading environment in Korea is making regulatory improvements, rather than reducing market liquidity.
This paper explores global regulations over unfair trading in the derivatives market, and suggests improvements for Korea’s regulations for unfair trading in the derivatives market. We first classify unfair trading events that happened in both the exchange-traded and OTC derivatives markets into categories: insider trading, price manipulation, and other unfair trading. Then, we draw some policy implications. The problem in Korea is that unfair trading related to derivatives receives only minor penalties and the procedure for imposing punishment is too lengthy. Also necessary for Korea is international coordination with global financial and legal authorities because more and more unfair trading related crimes in Korea involve overseas investors.
Based on the analysis of unfair trading cases in the domestic and global derivatives markets, we finally propose specific ways to improve Korea’s derivatives-related unfair trading regulations. First, it is recommended that the range of financial products subject to the derivatives regulations be extended. Also necessary are comprehensive regulatory guidelines: a more effective penalty system; a fast-track investigation procedure; more stringent disclosure rules; improvements to market infrastructure; a prevention program; and market surveillance for online activities.
The crackdown on unfair trading activities grows more difficult as derivatives trading becomes more complicated and sophisticated with the rapid growth of IT technology. Unfair trading cases related to derivatives are likely to cause massive losses to both retail and institutional investors, which could lead to systemic risk. Recently, Korea’s derivatives market experienced some unfair trading events: the price manipulation case in the ELS market, the plunge of the KOSPI200 on the option maturity day, and the allegation of unfair trading by ELW scalpers, just to name a few. All these cases had significant social ramifications.
To minimize these kinds of unfair trading incidents and to protect individual investors from huge losses in the derivatives market, Korean financial authorities strengthened regulations in the exchange-traded derivatives market. For example, the multiplier for the KOSPI200 options was raised from KRW 100,000 won to KRW 500,000 won. Also, strict limitations were placed on liquidity provisions in the ELW market. In addition, the leverage in FX margin trading decreased because the initial margin was increased. A desirable approach to build a fair trading environment in Korea is making regulatory improvements, rather than reducing market liquidity.
This paper explores global regulations over unfair trading in the derivatives market, and suggests improvements for Korea’s regulations for unfair trading in the derivatives market. We first classify unfair trading events that happened in both the exchange-traded and OTC derivatives markets into categories: insider trading, price manipulation, and other unfair trading. Then, we draw some policy implications. The problem in Korea is that unfair trading related to derivatives receives only minor penalties and the procedure for imposing punishment is too lengthy. Also necessary for Korea is international coordination with global financial and legal authorities because more and more unfair trading related crimes in Korea involve overseas investors.
Based on the analysis of unfair trading cases in the domestic and global derivatives markets, we finally propose specific ways to improve Korea’s derivatives-related unfair trading regulations. First, it is recommended that the range of financial products subject to the derivatives regulations be extended. Also necessary are comprehensive regulatory guidelines: a more effective penalty system; a fast-track investigation procedure; more stringent disclosure rules; improvements to market infrastructure; a prevention program; and market surveillance for online activities.