The Next 11 Financial Markets and South Korea

The Next 11 Financial Markets
and South Korea
Team Members:
1. Nguyen Thi Ngoc Huyen
2. Shilpa Pandeshwar
3. Nguyen Hien Minh Nhan
4. Mohamed Saad

Contents
1. The Next 11 and South Korea: Overview
1.1 The Next 11
- Characteristics
- Future prospects
- Role of rating agencies
1.2 South Korea highlights
2. South Korea’s Financial market
2.1 Overview
- Banking system
- Financial Intermediaries
- Financial market classification
2.2 Money markets
2.3 Forex markets
2.4 Capital markets
2.5 Derivatives markets

3
The Next Eleven Overview
- What is “N-11”?
- Characteristics
- Role of rating agencies
- Future Prospects
South Korea: Highlights
- Basic Data
- Economic Growth
- Political Structure
Coburg University of Applied Sciences / Department of Business Administration / Financial Management / Financial Markets and Institutions.

What is “N-11” term?
“Goldman Sachs' List of 11 Future Economic Giants”
• The Next Eleven, also known as N-11, is
a term coined by Goldman Sachs
Economist ”Jim O’ Neill” in late-2005 to
represent eleven countries could have
the potential to become the world's
largest economies in the 21st century,
the investment bank insisted that the
foundation was in place for future growth
over the coming years.
• The Next Eleven (N-11) are: Bangladesh,
Egypt, Indonesia, Iran, Mexico, Nigeria,
Pakistan, the Philippines, Turkey, South
Korea and Vietnam.
4
Jim O’ Neill
Source: Goldman Sachs’ The N-11: More than an acronym

N-11: Characteristics and Outlook
According to Goldman Sachs:
• Geographical Diversification: Europe, Latin
America, Africa, South-East Asia, and the
Middle East, making it a very geographically
diverse index for investors.
• Political Risk in Some Components: Includes
some countries with a lot of political risk,
including countries like Pakistan that can prove
volatile.
• Levels of urbanization and openness to
trade with the less developed economies
showing a strong rural bias and direct foreign
involvement in the economy ranging from non-
existent (Iran) to significant (Nigeria and
Vietnam).
5
Source: Goldman Sachs’ paper “THE N-11: MORE THAN AN ACRONYM”
Area
10 millions
km2
1 20% of World’s population in 2016 (World Bank data)
Population
1.36 billion
people1
GDP
6.38 trillions
USD2
• Population size is also quite different across
the group. While all of the N-11 are (by design)
relatively large in populations varying from
around 50mn for Korea to over 200mn for
Indonesia.
• Market development and investor focus also
differ. While four of the N-11 (Korea, Indonesia,
Philippines and Mexico) are commonly found in
market investment grade, the others generally
attract much less interest.
2 8.5% of World’s GDP

N-11:Qualitative Characteristics
Foreign Investment and Business Environment
• The N11 countries vary in their
business environments which
affects their relative attractiveness
as an investment destination.
• Business environment is a major
contributing factor for potential
growth and investments.
• Investors definitely will choose to
invest in country where operating
environments are not too difficult,
permits potential wage and job
growth.
South Korea
1. In 2015, received FDI
US$20 billion.
2. Ranked 4th in the
World Bank's 2017 Ease
of Doing Business survey
which is attributed to its
well-regulated tax and
investment code.
Turkey
1. In 2006, received FDI of
US$20.1 billion and in
2015, US$16.8 billion in
new investments.
2. Strategic geographical
location and its
consequent position as an
export and re-export hub.
Iran
1. In 2015, received direct
investment of US$876
million in 2015.
2. Ranked the lowest at
135th place, reflects its
authoritarian state-owned
business environment
where actively discourage
foreign investors.
In other countries
The regulatory enviro-
nment is unclear and
subjective, offering few
incentives for new
investment.
6
Sources:
1. Asia Pacific Institute of Advanced Research (APIAR)
2. The World Bank data

N-11:Qualitative Characteristics
Classification of Markets (FTSE)
Country Developed Adv. Emerging Sec. Emerging Frontier
Korea, Rep.
Mexico
Indonesia
Turkey
Nigeria
Iran*
Egypt
Pakistan
Philippines
Bangladesh
Vietnam
7
Source: FTSE Classification of Markets (September 2017)
*No available Classification for Iran

Data are in Billions 2008 2016
Korea 1002 1411
Mexico 1101 1046
Indonesia 510 932
Turkey 764 858
Nigeria 208 405
Iran 397 …
Egypt 163 336
Pakistan 170 284
Philippines 174 305
Bangladesh 92 221
Vietnam 99 203
N-11:Quantitative Characteristics
GDP In Numbers (2008-2016)
8
Source: The World Bank - World Economic Indicators
 Korea is the largest economy while Vietnam is the smallest.
 Egypt, Bangladesh and Vietnam GDPs are doubled.
 Indonesia and Nigeria GDPs are almost doubled.
0
200
400
600
800
1000
1200
1400
1600
2008 2016
Billions of USD

GDP Per Capita
9
Source: Data Bank - World Economic Indicators (world Bank)
Per Capita: GDP per capita is a measure of a country's economic output that accounts for population.
 Korea is the highest income while Bangladesh and Pakistan are the least
 Turkey and Mexico are the second and third highest respectively
 Vast spreads between countries
Country 2016
Korea 27,538.8
Mexico 8,201.3
Indonesia 3,570.3
Turkey 10,787.6
Nigeria 2,178.0
Iran (No data)
Egypt 3,514.5
Pakistan 1,468.2
Philippines 2,951.1
Bangladesh 1,358.8
Vietnam 2,185.7
Korea
43%
Mexico 13%
Turkey
17%
Indonesia
6%
Nigeria 3%
Egypt 6%
Pakistan 2%
Philippines 5%
Bangladesh 2% Vietnam 3%

Inflation rate (2008-2016)
10
Inflation, consumer prices* (annual %)
*Inflation as measured by the consumer price index reflects the annual percentage change in the cost to the average consumer of acquiring a
basket of goods and services that may be fixed or changed at specified intervals.
Source: Data Bank - World Economic Indicators (world Bank)
• Korea, Mexico, Indonesia
and Philippines are the
only countries who kept the
inflation low and controlled.
• Nigeria, Iran, Egypt, Pakistan
and Vietnam are the highest
inflation rates.

N-11: Credit Ratings
Country Rating (2017) Future Outlook
Korea, Rep. AA Stable
Mexico BBB+ Stable
Indonesia BBB- Stable
Philippines BBB Stable
11
Source:
1. S&P rating report
2. Reuters news
* No available rating for Iran
InvestmentSpeculativeHighly Speculative
Nigeria B Stable
Egypt B- Stable
Pakistan B (31/10/2016) Stable
Iran* BB-* (CI Ratings) ---
Vietnam BB- Positive
Bangladesh BB- Stable
Turkey BB Negative

N-11: Issues Facing Credit Rating Agencies
12
Although there appear to be roughly 150 local and international credit rating agencies worldwide
(Basel Committee on Banking Supervision). Moody’s, Standard & Poor’s, and Fitch are clearly
the dominant entities.1 Also there are some issues facing them when rating a Next-Eleven market.
Sources: 1Journal of Economic Perspectives—Volume 24, Number 2 – Page 216
Barriers Risks
• Openness for foreigners and
ease of access to information
(e.g.: Iran)
• Data availability
• Government regulations
• Security concerns
• Cost limitation for assessing
markets
• Economies of scale
• Information reliability (e.g.:
Greek Debt crisis)
• Data consistency for
maintaining regular ratings
• Economic volatility

N-11:Future Prospects
IMF/PWC Projections Till 2050
13
PPP: Purchasing Power Parity is is when the currencies of all countries are converted into USD (United States Dollar).

Economic Data
2.8
0.7
6.5
3.7
2.3
2.9
3.3
2.6 2.8
0
1
2
3
4
5
6
7
2008 2009 2010 2011 2012 2013 2014 2015 2016
South Korea - GDP % Growth Rate
14
Long-Term Rating1
Stable
1: S&P rating August 2017
Economic snapshots (% annual growth rate)
Oxford Economics (June 2017)
(f): Forecast
f
800
900
1000
1100
1200
1300
1400
1500
2008 2009 2010 2011 2012 2013 2014 2015 2016
South Korea - GDP in $ Billions
Source: The World Bank | World Development Indicators
(f)

SMEs and Business Climate
• SMEs: • Business Climate:
• Korea was ranked the 4th easiest place in the
world to do business.
• Increasing regulations transparency.
• Aggressive protection of intellectual property.
• FDI-friendly government policies and
investment incentives.
15
Source: Korean Ministry of SMEs and Startups
National Statistical office
Electricity Rates in Major Markets
(USD/MWh)
Source: OECD/IEA "Energy Prices and Taxes 2Q 2014", 2013
* Source: Bloomberg Innovation Index (2017)
3.54 Million
14.02 Million
• Affordable, reliable infrastructure utilities
• Innovative environment and R&D.

Large Corporations
16
Korean: Large
industrial corporations
in Korea also
classified as one of
the largest in the
world.
Foreign: Around
16,000 foreign
companies are doing
businesses in Korea
223 companies are
Fortune 500 Global
Enterprises.
Source: InvestKorea.org website

17
1. Money Market 2. Capital Market 3. FOREX Market
4. Derivatives
Market

OVERVIEW

19
In addition, the Bank performs the
typical functions of a central bank:
1. Issuing banknotes and coins
2. Formulating and implementing
monetary and credit policy
3. Serving as the bankers' bank
and the government's bank.
South Korea: Market Overview
Banking System
• The Primary Purpose of the BOK
is the pursuit of price/financial
stability.
• The Bank sets a price stability target
in consultation with the Government
• Publishes an operational plan
including monetary policy.
Source: Bank of Korea Official Website
1. Central Bank “Bank of Korea”
Established on June 12, 1950 under the Bank of Korea Act.

Banking System
Monitoring the Financial System and
Evaluating Its Stability
Analyzing Management Status and
Conducting Joint Examinations of
Financial Institutions
20
Source: Bank Of Korea Official website
Publishing the Financial Stability Report (semi-annual)
Operating and Supervising the
Payment and Settlement Systems
Providing Emergency Liquidity
Assistance
The BOK’s Role in ensuring Financial Stability

Banking System
• The BOK has full operational
autonomy in theory:
• The president has the right to
re-appoint or fire the Governor
and/or the Deputy Governor.
• Governor’s term is 4 years.
• Deputy Governor term is 3 years.
21
Source: Factbox: South Korea's central bank and the government
Bank of Korea Independence
• There also is a way that the president
can veto a monetary policy board
decision.
• The BOK is required to receive the
Ministry of Strategy and Finance’s
approval on its annual budget.
We can say that the Bank of Korea is not very independent from the government,
but we can say that both of them are working to maintain financial market
stability and increase the FDI.

22
2. Financial Institutions serve mainly as intermediaries for savings and investment
between savers and borrowers, and are commonly divided into six categories:
1. Banks
• (12 Korean + 5 Specialized , 49 Foreign)=
66 institutions.
 Banks are divided into commercial banks and
specialized banks
2. Insurance Companies
• 58 different companies (25 Life - 32 Non-life)
 Institutions that underwrite and operate insurance
against death, disease, old age, or a variety of
accidents including fires.
3. Financial Investment Business Entities  Primarily trading marketable securities in the direct
financing markets.
4. Non-bank Depository Institutions
• (~3674 institiutions) e.g.: Credit unions
 Mainly concern themselves with taking deposits
and lending, similar to banks, but are established
for more limited purposes.
5. Other Financial Institutions
• e.g.: leasing, credit card and installment
financing.
 Institutions that are difficult to classify among the
four mentioned categories.
6. Financial Auxiliary Institutions
• e.g.: the Korean Exchange authority and
financial brokerage companies.
 Institutions that, rather than directly taking part in
financial transactions, mainly provide the conditions
necessary for smooth operation of the financial
system.
Source: BOK’s Financial Institutions in Korea as of 2016
2. Financial Institutions serve mainly as intermediaries for savings and investment
between savers and borrowers, and are commonly divided into six categories:

FTSE Classification: Developed financial market
• Restricted factors
• No or selective incidence of foreign
ownership restriction: Restrictions on
foreign ownership remain for 30
industrial sectors, three of which are
entirely closed to foreign investment.
• Free and well-developed foreign
exchange market: The BOK, in
consultation with the MOSF, is also in
charge of implementing the actual
foreign exchange market interventions.
• Settlement: There exist specific
settlement rules / settlement restrictions
applied.
• Off-exchange transactions: not
permitted.
• Efficient trading mechanism: some
limitations due to the government’s
restriction.
23
Source: FTSE Quality of Markets (Asia-Pacific)

Financial Markets Structure
24
Source: Bank of Korea, Financial Markets in Korea (2017)

1. Money Market

Money Markets: Overview
26
• What is Money Markets? Markets that facilitate the flow of short term
funds i.e. with maturities less than one year.
• Introduction of reforms in South Korea such interest rate liberalization, changes in
monetary policy, financial industry between 1990s - 2000s
• Since late 2000, further restructuring to improve efficiency and balanced growth.
• Since 2010, imposition of call borrowing limits for securities companies.
• As of 2016, money market in South Korea 364 Billion USD in size, 9 times than
end of 1990.

Money Markets: Products
27
Call Markets
Repurchase
Agreement
(repo)
Certificate of
Deposit (CD)
Commercial
Paper (CP)
BOK
Repurchase
Agreement
(BOK repo)
Electronic
Short Term
Bond Market

MONEY MARKET SIZE Units: BILLION, WON, %
1990 2000 2010 2016
Volume Share Volume Share Volume Share Volume Share
Call 3,397 7.7 16,058 11.6 22,501 8.5 9,390 2.4
Repo 3,377 7.6 26,115 18.8 78,766 29.7 133,829 33.8
CP 12,740 28.7 44,677 32.2 76,366 28.8 132,997 33.6
Electronic
short-term
bond
- - - - - - 35,365 8.9
CD 6,804 15.4 14,218 10.2 44,472 16.8 24,162 6.1
Cover bill 277 0.6 11,201 8.1 1,604 0.6 524 0.1
MSB 15,241 34.4 26,488 19.1 41,140 15.5 53,670 13.6
T-bill 2,500 5.6 0 0.0 0 0.0 6,000 1.5
Total 44,335 100.0 138,757 100.0 264,849 100.0 395,937 100.0
Money Markets: Size
28
(Average Fx rate in 2016: 1USD = 1,161KRW)

Money Markets
Call Markets: Features
• Since July 2010, the participation of non-bank financial institutions limited gradually.
• After reorganization of the call market, its share in the overall money market dropped sharply from
22.8% in 2009 to 6.7% in 2016.
29
The Korea Development Bank
Commercial banks
The Industrial Bank of Korea
The Export-Import Bank of Korea
Securities companies chosen as KTB primary
dealers or eligible counterparties for the Bank of
Korea OMOs
Asset management companies and fund
brokerage companies.
Call trades
Brokered deals (99%).
The three fund brokerage
companies:
1.Korea Money Brokerage
Corporation, Seoul Money
Brokerage Services, KIDB
Money Brokerage Corporation
Direct deals (less than 1%)

Money Markets
Call Markets: Volume
0
10
20
30
40
50
60
70
2008 2009 2010 2011 2012 2013 2014 2015 2016
Others
Securities Companies
Foreign Bank Branches
Domestic Banks
Outstanding Balances of Call Borrowing
Billions of USD
30
• Decline in call trading volume between 2008-2009 aftermath of global financial crises
• Recovery in 2010 and decline 2011 onwards due to restrictions in call borrowing of securities
companies
• 2015 decline due to due to the restrictions on call loans that can be extended by asset
management companies
Source: Bank of Korea Website
(*) Based on daily average outstanding balances of brokered trades during the periods

TYPES OF REPO MARKET
31
Repurchase Agreement (REPO) Markets
Institutional Repo Market/ Over the
Counter Market
Customer Repo Market
• Used by financial institutions to balance
out any shortages or excesses they
face of short-term funds
• No legal restrictions on the types and
credit ratings and securities
• Participants- banks, asset management
companies, securities companies,
insurance companies, merchant banks,
and several public financial companies
such as the Korea Securities Finance
Corp., the Korea Housing Finance
Corp., and so on.
• Used by financial institutions to raise
short-term funds from households and
corporations
• Restrictions on the types of credit
ratings and securities that can be traded
• Participants - securities companies,
banks, Korea Securities Finance
Corporation, merchant banks and the
communications agency, individuals,
corporations and trusts

32
• Increased with the reorganization of the short-term financial markets, including the restriction of call
market participation by non-bank financial institutions.
• The main sellers of customer repos are securities companies, accounting for 92.4% (73 Billion USD)
of total customer repo trades as of 2016.
• For institutional repos, the major sellers are securities companies, and the buyers are asset
management companies, bank trusts and securities trusts.
Repurchase Agreement (REPO) Markets
0
10
20
30
40
50
60
70
80
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Customer Repo
Institutional Repo
Outstanding Balances of Repo Balances
Source: Korea Financial Investment Association, Bank of Korea, Korea Securities Depository
Billions of USD
(*) At period-ends, except exchange-traded repos

Money Markets
Commercial Paper: Features
• Disclosure of official CP rate twice a day (11:30, 15:30) by the Korea Financial
Investment Association
• Composition of CP credit rating from highest to lowest rating of A1, A2, A3, B, C, and D
• Since 2010, decline in issuance of CPs due to the introduction of electronic short-term
bonds.
• Increased markedly in General Asset Backed Commercial Paper (ABCP)s to 120 Billion
USD as of 2016
33

Commercial Paper: Trade Volume
34
• Introduction of electronic short bonds inversely affected volume of CPs
• However, strong strength in 2016 – 120 Billion USD as of 2016
0
20
40
60
80
100
120
140
2008 2009 2010 2011 2012 2013 2014 2015 2016
Non-financial corporations
CP Outstanding Balances
Billions of USD
(*) At period-ends
Source: Bank of Korea, Korea Securities Depository

Money Markets
Certificate Of Deposit: Features
35
• Calculation and announcement of CD rate twice daily (11:30 and 15:30) by the Korea Financial
Investment Association
• Has been controversial to use CD rate as reference rate for financial trades such as bank
loans
• Continual efforts to develop alternative reference rate to replace the CD rate
• Shrunk significantly since the announcement to introduce the regulation on loan-to-deposit
ratios in December 2009
• Drop in shares of CD market from 16.8% end of 2010 to 6.1% end of 2016
• No restrictions in minimum CD face value. However, a minimum available value in accordance
to internal bank rules

2. FOREX MARKET

Currently, 1 USD is equal roundly 1,092 KRW. Historically, the South
Korean Won reached an all time high of 1962.50 in December of 1997
and a record low of 667.20 in July of 1989.
Market Structure:
37
Interbank
Market
Customer
Market
Direct Trade
Sources:
Bank of Korea website / YONHAP news agency
FX Market Volume
Globally
FX Daily Average
$ Billion
International Reserves
$ Billion
KRW/USD fluctuation
Currency quoting: The Korean won-U.S. dollar rate to be
determined on the basis of underlying demand-supply conditions
in the interbank market.
Historical Development:
1962-1980: The Korean won was pegged to the US Dollar.
1980: Multiple-basket pegged exchange rate system.
1997: Currency crisis and shifted to Free-Floating system.
2009: Foreign Exchange Liberalization Plan.

3. CAPITAL MARKET

Capital Markets: Overview
39
EQUITY MARKET DEBT MARKET
BOND MONETARY
STABILIZATION
BOND (MSB)
MARKET
PRODUCTS
 Since the 1997 currency crisis, new measures to
develop the market:
• Lengthen the maturities of government bonds
• Limits on foreign investment is eliminated
Financial Services Commission
Financial Supervisory Service
The Korea Exchange
REGULATORYBOARD

Equity Markets: Primary markets
Stock Markets
Primary markets
IPO
Paid-in Capital
Secondary
markets
KOSPI
KOSDAQ
KONEX
K-OTC
 IPO=> Register to Financial
Services Commission
 =>Listing to Korea Exchange
 Since 2007, the KRX promoted
foreign companies IPOs to grow
international stock markets.
0.6
3.17
2.18
3.89
5.46
2013 2014 2015 2016 2017
$Billions
Total IPO value in KOSPI
 The IPO market has continued to expand this year.
Sources: Korea Exchange

Equity Markets: Secondary Markets
KOSPI Market
1956
KOSDAQ Market
1996
K-OTC Market
2005
KONEX Market
2013
1. KOSPI: medium to large-sized blue chip
companies
2. KOSDAQ: venture and small and
medium-sized companies
3. KONEX: small and middle-sized start-
ups
Sources: KRX Markets
KRW1.871 Tril ~ $ 1.702 Bil
$1.455 Bil 243 4.5
Updated 12/2017

Equity Markets: Stock Exchanges
 In 2017, KRX tightening
regulations on short-selling
 Listing requirement for foreign
companies:
 All the necessary documents for
listing should be written in Korean.
 Since 2011, KRX accepts
accounting standard under IFRS to
list on KOSPI and KOSDAQ
market.
Market Cap: $1.33 Trillion
Ranked 14th in the World
Settlement T+2
Trading Schedule
Monday-Friday
9:00-3:30pm
Sources: www.stockmarketclock.com/exchanges
*Updated 3/2017
Recent improvements

Sources: PWC Korea 2015
43
Equity Markets:
Listing on Stock Exchanges
No Criteria KOSPI KOSDAQ
1 Operating history At least 3 years At least 3 years
2 Capital size
Over KRW 30 billion of shareholders’
equity
Over KRW 3 billion of shareholders’ equity or over
KRW 9 billion of Market Capitalization
3 Share distribution At least 700 shareholders At least 500 shareholders
4 ROE or income
ROE : 5% of ROE for the latest fiscal
year and 10% of ROE for the recent 3
years
General Corporate Venture Company
ROE 10% ROE 5%
Net income of KRW 3 billion for the
latest fiscal year and an aggregate of
KRW 6 billion in the recent 3 years
Net income of KRW 2 billion
for the latest fiscal year B.
Net income of KRW 1 billion
for the latest fiscal year
Net income of KRW 2
billion for the latest fiscal
year B. Net income of
KRW 1 billion for the
latest fiscal year

Stock Markets: Index & Trading volume
SOUTHKOREAVIETNAM
JAPAN
$2 Billions $10 Billions
$500 Millions
Historically, the South Korea Stock
Market (KOSPI) reached an all time
high of 2557.97 in November of 2017
and a record low of 93.10 in January
of 1981.
Source: Bloomberg

Bond Markets: Overview
45
Bond Type Coupon Rate Interest Payment Issuer
Maximum Issuance
Amount
Maturity
KTBs Bidding semi-annually Government
Within limits approved by
the National Assembly
3-5-10-20-30-50
NHBs 1.25% (6/2016)
Principal and interest
are repaid at maturity
Government
5-10
Treasury bills Bidding
Discount bonds
(zero-coupon bonds).
Government
Less than 3 months
MSBs
The Bank of
Korea
the Monetary Policy Board
Bank debentures Banks
Up to five times of equity
capital
Corporate bonds
There are ten grades of
bond ratings, ranging
from AAA to D.
Corporations
No limit. The maximum
issuance limit was
eliminated in April 2012.
Sources: Korea Exchange, Korea Financial Investment Association

SECONDARY MARKETS
Exchange-traded market
General Bonds: NHBs,
Small Bonds…
KTS Bonds
Over-the-counter (OTC)
market (Mainly traded)
Trading time 9:00-16:00
Units of 10Billion won ~
0.9Million $
Settlement T+1
46
Bond Markets: Secondary Markets
157
428
3834
43
180
0
100
200
300
400
500
600
2002 2010 6M/2016
MillionsUSD
Trading Volume
OTC Exchanged-traded
Sources: Korea Exchange,
Korea Financial Investment Association
The main factors of the rise:
• The increased bond issuance after the currency crisis
• Greater trading for profit by institutional investors
• Introduction of mark-to-market bond valuation(*)
• Low market rate
• Efforts to boost bond transactions by government.
(*)A measure that can reflects current market value

47
Bond Markets: Corporate Bonds
Issuance
Public offerings
Private placements
• Companies that issue corporate bonds are required to obtain
credit ratings from two or more credit rating agencies on their
profitability, cash flows and financial stability.
70
5
25
Corporate bonds issued in
the first half of 2016
A or higher BBB
BB and lower
7.5
5.2
4.4
10.6
14.4
12.0
10.3
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
2002 2006 2008 2010 2012 2014 6M/2016
Millions$
Corporate Bonds Trading Volume
Sources: Korea Exchange
AAA DTen grades of
bond ratings

48
Bond Markets: Bond Yields Trend
Bond yields rose dramatically
in 2007-2009 as:
• Foreign investors
increased their sales
volumes
• The formulation of
supplementary revised
budget bill of the
government
• The increase of public
corporation bond issuance
• The yield showed a continuing gradual upward trend, driven by the easing of risks in the Euro
zone, reduced expectations of the BOK Base Rate cut, and anticipations of global economic
recovery (BOK – Bank of Korea)

MSBs
Issued through public offerings
Bidding
Fixed rate tender
Maturities of up to two years
The Bank of Korea selects
institutions to participate this
market
MSBs with maturities of one year
or more accounted 88.7% of the
total outstanding MSB balance at
the end-June 2016.
49
Bond Monetary Stabilization Bond (MSB) Market
Unique tool by Korea
government to control
excess liquidity

Pop Quiz
1) What were the financial instruments presented?
• Call market, Repo, CP & CD
• CD, Treasury Bill, Repo & Electronic Short term Bond
• CP, Call Market & Electronic Short term Bond
• 2) Which financial instrument has the highest volume in the South Korean market?
• Call Market
• CD & Repo
• Electronic Short term Bond
50

5. Derivatives Market

• Forward exchange trading was quite active early
on due to the need on hedging foreign exchange
risk, other derivatives markets were almost non-
existent until the mid-1990s.
• In the exchange-traded market, equity futures and
options are the most actively traded.
• In the over-the-counter derivatives market,
forward exchanges and interest rate swaps are
the most active.
• In 2015, the KOSPI 200 option was the third most
traded derivative among the world’s stock index
futures and options.
52
Derivatives Markets: Overview
EQUITY
DERIVATIVES
MARKET
INTEREST RATE
DERIVATIVES
MARKET
FOREIGN
EXCHANGE
DERIVATIVES
MARKET
CREDIT
DERIVATIVES
MARKET
DERIVATIVES-
LINKED
SECURITIES
MARKET

KOSPI 200 Future
May 1996
KOSDAQ 50 Future
Jan 2001
Stock Single Future
May 2008
KOSPI 200 Sector Index
Future
Nov 2014
KOSDAQ 150 Future
(replace KOSDAQ 50
Future)
Nov 2015
Mini-KOSPI 200 Futures
Jul 2015
53
Korea’s leading futures market (The amount of transactions per contract was
reduced to one-fifth of the KOSPI 200 futures)
1. Stock Index (Single Stock) Futures Markets
Equity Derivatives Market
KOSPI 200 Options
Jul 1997
KOSDAQ 50 Options
(closed in November 2005 due to a
lack of sufficient trading)
Nov 2001
Single Stock Option
Jan 2002
Mini-KOSPI 200 Options
Jul 2015
2. Stock Index (Single Stock) Options Markets

Note: 1) From March 2017, the multiplier is 250,000 won.
54
Equity Derivatives Market

KOSPI 200 futures price and the KOSPI
55
• The KOSPI 200 futures price moves in line with the KOSPI in the spot market.
• KOSPI 200 futures prices started to rise from 57.4 on September 26, 2001, and then fell as a result
of the global financial crisis in 2008.
• The price climbed back to a record high of 296.0 on May 2, 2011, and remained around 250. As of
the end of June 2016, the price stood at 244.3.

Interest Rate Derivatives Market
Interest rate futures market
56
Certificate of deposit (CD) interest rate
futures
(delisted in Dec 2007)
Apr 1999
Three-year Korea Treasury Bond
(KTB) futures
Sep 1999
Single Monetary Stabilization Bond
(MSB) futures
(delisted in Feb 2011)
Dec 2002
The only futures listed were for three-, five- and
ten-year KTBs with the three year KTBs are the
most active.
Source: Bank of Korea, Kore Exchange
Underlying
Asset
•Bonds (usually
traded in OTC
market)
Price
•As the same in the
stock future
markets
Market
Players
•Korea Exchange
•Derivatives
members
•General customers
3-year KTB futures 5-year KTB futures 10-year KTB futures
Underlying assets 3-year KTB
(100 million won face
value,
5% coupon rate)
5-year KTB
value,
5% coupon rate)
10-year KTB
value,
5% coupon rate)
Customer margin rate
0.75 1.35 2.55
Member margin rate 0.50 0.90 1.70
Price denomination Face value of 100 million won denominated
as 100.00
Settlement cycle March, June, September, December
Last trading day Third Tuesday of contract month (T+1)
Settlement method
Cash

-
20
40
60
80
100
120
140
160
2010 2011 2012 2013 2014 2015 2016
Thousand
Volumes of interest rate futures transactions
3-year KTB futures 10-year KTB futures
Unit: Average number of contracts per day
57
• The trading of three-year KTB futures has grown significantly as transactions of three-year KTBs, the
underlying assets, have increased.
• Ten-year KTB futures did not originally see much market growth because long-term investment institutions
had a tendency to hold long maturity bonds and so the demand for hedging was not large.
• After the implementation of the system to revitalize the long-term government bond futures market in
October 2010, the transactions have increased.
Source: KOSCOM

Interest rate swap market
58
Interest Rate Derivatives Market
3 months – 20
years
10 billion Won
Each 3 months
CD (91-day)
rate announced
by the Korea
Financial
Investment
Association
Interbank and
customer
markets
• Developed in earnest in 2000, rapid
growth from 2005.
• Expanded 15-fold to an average of
253.1 trillion won per month in 2010.
• Weakened considerably, recording
monthly average trading of 109.1
trillion won in the first half of 2016.
1. Based on monthly average trading
volumes during the periods
2. OTC market KRW interest rate swap
Source: Financial Supervisory Service

FOREIGN EXCHANGE
DERIVATIVES
MARKET
• Foreign currency swap
market
• Forward exchange
market
•Outright forwards
•Swap forwards
CREDIT DERIVATIVES
MARKET
• Credit default swaps
• Total return swaps
• Credit-linked notes
• Synthetic collateralized
debt obligations
DERIVATIVES-
LINKED SECURITIES
MARKET
• Equity-linked warrants
• Equity-linked securities
• Other derivatives-linked
securities market
• Exchange-traded notes
59
Other Derivatives Markets

Questions
1. What are the main characteristics of the N-11 Countries?
2. What are the prospects for the N-11 over the next few decades?
3. What are the obstacles to make N-11 success, and what would need to
change to make success more likely?
4. Why South Korea is categorized as a development market?
5. Why investors should consider South Korea’s market?
Thank you

The Next 11 Financial Markets and South Korea

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