Updates on KOSPI

There were 2 new important changes made on the KOSPI200 Products starting in September 1, 2014

1. There was introduction to Long-term Settlement Contracts

Settlement month setup

• 3 additional settlement contracts to be listed for KOSPI200 futures, 7 additional settlement contracts to be listed for KOSPI200 options.

 [KOSPI200 Futures and Options contract month]

 

-Currently there aren’t too many trades on the new longer contract months, but KRX in the upcoming months will look to reflect the new KOSPI200 Future contracts on the CME Night Session.

2. Block Trades have been enabled for KOSPI200 Futures and Options

Currently the Block Trades have been only for KTB, Currency Futures, but KRX has now enabled it for the KOSPI200 Futures and Options. Currently the minimum contract size is at 100 lots. There has been a growing interest and KRX views it to be quite successful, especially because now it brings some flow that was done OTC into the Exchange.

The Exchange is very keen to improve this market further as it is bringing more interesting flows to the market, and will hold an info session tomorrow Friday seeking feedback from representatives of each KRX members in charge of entering block trades.

KRX New Error Trade Relief System

Error Trade Relief System

New relief system, no need for agreement of counterparties

To meet requirements of error relief:

1. Need to request for relief within 30 minutes of initial error trade
2. Series/consecutive quotes need to be entered after initial error trade and the quotes have been continuously filled
3. Accounts: The error triggered account 1 (in case same Member, but different account but same holder as the error account, this other account will not be accounted for)
4. Error trade price: prices that exceed error relief levels
5. Loss amount has to be more than 10,000,000,000 KRW per product (similar underlying asset and trading method of all products that error trades resulted will need to sum amount of expected losses. In case error trades buy/sell trades both happen, will calculate separately and add absolute value of each loss amount) Calculation for error trade amount: Σ (Error Relief Price- Reference Price) * Lots* Multiplier

**Exempt: Global trades/block trades: CME within 8 minutes need to request for relief; EUREX within 30 minutes (for prenegotiated trades)

Member should compile report request for relief

KRX will then register the request and will send out a notice to all members.

Then will also send the Member of the counterparty of the error traded related product fill number detiails

Once the error trade happens, the last traded fill price before the error trade will be applied. If that price is not appropriate according to market standards, then that point FV will be applied as reference price

KRX after confirming reference price, will notify error relief member and counterparty members on the relief trade product, reference price.

The error trade counterparty account should consider/note KRX error trade whether relief will happen or not, relief price, and relief timing, so that the KRX relief system will not give any damange to the counterparty, should cope with market situation change by making decision on reducing timing and price on current open interest.

Members should always remind existing clients and also incoming new clients that according to the KRX regulations, when error relief takes place, the fill price of one’s trades can be modified without client’s request. And members need to keep record of this

Another Error Trade, but no KRX relief

http://www.econovill.com/news/articleView.html?idxno=220320

September 15, 2014

Right after KRX releases its new reformed error relief system, there was an error trade on KOSPI200 Call Strike 230 for October during closing auction. Despite KRX new real time price band that was implemented in Sept 1, it is disabled during opening and closing auction (8:00-9:00 KST; 15:05-15:15).

302 lots of 201JA230 got filled at 66.80 in the closing auction. Before the closing auction, only 2 lots got filled throughout the day and the price was 30.00 and 31.05 each.

KRX has rejected to bust this trade as some of conditions are disqualified for the bust rule. So, the only way they can try is finding counter parties and negotiate with them. With simple calculation, it may cause USD4-5M of loss.

It has now been known to be an Israel client of Hyundai Securities. Currently the client has defaulted and the position is still in the market. Hyundai Securities for now paid on behalf but will inevitably sue the client, perhaps once the position is settled more details will emerge.

It is unfortunate because KRX just came out with their new error trade rules for September 1, but the trade did not qualify due to the amount.  (Minimum is around USD 10MIL, and will be an adjustment of price-not a bust cancellation)