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FAQ

  • Critics say that complicated credit derivatives like credit default swaps played a significant role in exacerbating the current global financial crisis. Please comment on the trading volume and the level of risk in the Korean derivatives market.

  • As complicated derivatives are not yet actively traded in the Korean financial market, Korean financial institutions' exposure to derivatives is meager compared to institutions in the US or UK. Unlike exchange-traded derivatives like KOSPI 200 futures and options, but over-the-counter (OTC) derivatives have not been traded actively. Particularly, credit derivatives, which have contributed to the global financial crisis, only account for less than 0.07% of the total notional amounts outstanding in the Korean OTC derivatives market. As of end of June 2008, the notional amounts outstanding of OTC derivatives in Korea was approximately 5.9 trillion dollars, amounting to only 3.4% of the US volume (172 trillion dollars) and 23.0% of the Japanese volume (25.7 trillion dollars).


    < Notional Amounts Outstanding of OTC Derivatives in Korea >

    (as of June 30 2008, trillion won)

    Total Banks Securities Co. Insurance Co. Trust Co. Others
    Total 6144.0 5916.4 159.5 28.9 35.2 4.0
    Securities 87.7 14.3 70.3 2.1 1.0 0
    Interest Rates 3296.5 3218.8 71.2 2.3 1.8 2.3
    Currencies 2746.2 2670.8 16.7 24.5 3.2 1.7
    Credits 4.5 3.6 0.98 0 0 0
    Others 9.1 8.9 0.3 0 0 0

    The average ratio of derivatives assets to total assets for domestic financial institutions remains at a remarkably low level of 2.0 percent compared to 19.7 percent of US commercial banks.16


    < The Ratio of Derivatives Assets to Total Assets >

    (as of March 31 2008, trillion won, %)

    DB FBB DSC FSC Total (-FBB) Total U.S. CB
    Derivatives Assets (B) 36 43 2 2 1 41 84 1,780
    B/A 2.4 21.9 1.8 17.0 0.4 2.0 3.8 19.7

    Sources: Office of the Comptroller of the Currency (OCC) (as of year-end 2007), Financial Supervisory Service (FSS)

    16 The fair value of gains on derivatives contracts can be counted as derivatives assets according to ISDA Standards.

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