The Korea Exchange has cut customer margin requirements on Samsung Electronics and SK hynix futures for the first time this year, in what market participants read as an attempt to lower entry barriers and boost liquidity in the derivatives market as a sluggish stock market has drained trading volume.
In the October regular adjustment of margin requirements for the derivatives market, the customer margin rate on Samsung Electronics futures was lowered to 42.60% from 49.95%, a cut of 7.35 percentage points, the Korea Exchange said on the 5th. The rate on SK hynix futures was trimmed to 49.05% from 49.95%, down 0.90 percentage point. The two rates stood at 22.20% and 29.85% respectively in January before climbing through the year to just below the 50% ceiling in September. Margin rates on KOSPI 200 and KOSDAQ 150 futures were left unchanged at 21.75%.
The move is seen as an effort to relieve a drought in derivatives trading. Between July and September, when the market failed to rebound after a sharp selloff, the exchange raised margin rates and leverage on derivatives was halved to about two times. Investors pulled out under the funding burden, and even institutional arbitrage and hedging activity shrank, according to market participants.
Market watchers expect derivatives trading to pick up as margin burdens ease on the country's two largest stocks by market value. Some say the change could also lift cash market turnover by reviving incentives for institutional program arbitrage, which exploits price gaps between spot and futures. "With cash trading at its lowest level of the year, many pointed out that high margin requirements in the derivatives market were widening the liquidity gap," an official at a securities firm said. "It is a signal that the exchange has shifted its policy toward supplying liquidity and stimulating trading now that the market has found a floor."
