Analysts and bankers are warning that South Korea could weaken volumes in its equity derivatives market, one of the world's largest, with a planned transaction tax on options and futures.
Seoul’s ministry of strategy and finance announced on Wednesday that it planned to introduce a tax of 0.001 per cent on the value of futures contracts linked to the Kospi 200 index of the largest Korean stocks, and a levy of 0.01 per cent on the premiums for options. It expects annual revenue of $89m from the tax, which will be introduced in January 2016.
South Korean authorities have encouraged growth in equity derivatives in recent years, as part of efforts to strengthen Seoul as a financial centre. This month Kospi 200 futures have had an average daily trading volume worth $50.2bn, while the options market is the busiest of its kind in the world, with a typical daily turnover of more than 5m contracts.
A ministry spokesman said the measure was designed to bring taxation of derivatives in line with the approach to other securities. A tax of 0.3 per cent to 0.5 per cent is levied on share transactions.
Korea would be one of the first countries to introduce a tax on equity derivatives. A similar proposal has opened a rift in Europe. The UK government has criticised plans for a transaction tax mooted by France and Germany, complaining that it would damage London's status as a financial hub.
Growth in the derivatives market, launched in 1996, was initially driven largely by retail investors, but it has enjoyed growing interest from foreign institutional investors since 2006, when authorities relaxed regulations to attract them. Overseas investors account for about half of trading in Kospi 200 options and about a third of trading in futures, estimates Jun Gyun, a derivatives analyst at Samsung Securities.
The taxes would “certainly reduce trading volumes of options and futures by increasing transaction costs”, Mr Gyun said, although he added that the long preparation period before their introduction would soften the impact.
One senior figure in the Seoul office of an international bank criticised the measure, warning it would have a “deleterious” effect on liquidity, and saying it was driven by the interests of politicians rather than regulators.
Lee Inhyung, head of capital markets research at the Korea Capital Market Institute, said the levy was probably aimed at reducing speculative trading, which has been blamed for volatile movements in some large but relatively illiquid stocks. He noted that it would particularly discourage computerised high-frequency trading.