Considering the Abolition of Tax Exemptions for Derivatives Market Makers

Ahead of Tax Law Amendment Announcement
Considering Plan Without Sunset Extension
Ministry of Economy and Finance "In Consultation with Exchange"

"Appears to Secure Revenue Shortfall Amid Securities Transaction Tax Cut"
Industry Expresses Concern Over Market Contraction

[Asia Economy Reporter Minji Lee] The government is considering ending the securities transaction tax exemption benefit for derivatives market makers by the end of this year. Concerns are being raised that if the tax exemption disappears amid a shrinking derivatives market, trading costs will increase and the market could become obsolete.

According to the financial investment industry on the 4th, the Ministry of Economy and Finance is reviewing a plan not to extend the sunset clause on the securities transaction tax exemption benefit for derivatives market makers ahead of the tax law amendment announcement next month. Recently, the Ministry of Economy and Finance conveyed to the Korea Exchange that a reexamination of the necessity of the tax exemption benefit for derivatives market makers is needed. A securities industry official said, "We recently received opinions that extending the tax exemption benefit for derivatives market makers might be difficult." Regarding this, a Ministry of Economy and Finance official stated, "We conveyed to the securities industry that it is necessary to review how much effect the tax exemption benefit can have on the market and whether the operation has been properly conducted," adding, "We are currently consulting with the Exchange and nothing has been decided yet."

Market makers refer to securities firms that play a role in increasing liquidity to ensure smooth trading in the market. The Exchange assigns market makers by product, and the securities firms have an obligation to continuously submit both sell and buy quotes within a certain spread for the designated items. Currently, 18 securities firms serve as market makers.

Market makers are exempt from securities transaction tax under Article 117-2-5 of the Restriction of Special Taxation Act. According to this provision, market makers engage in hedging transactions by selling in the spot market to avoid price fluctuation risks, and at this time, they are exempt from transaction tax on the relevant stocks. This exemption was temporarily implemented for three years starting January 2015 and was extended once more from 2018 until the end of this year.

Within the securities industry, this is seen as a measure to reduce tax exemption benefits amid discussions about lowering securities transaction tax. Another securities industry official said, "Initially, there was consensus that if trading in the derivatives market increased through market makers, tax revenue would actually increase," adding, "With the tax reduction discussions, securing tax revenue has become more important, so this perspective may have changed."

Previously, the government introduced the tax exemption benefit for market makers to revitalize the derivatives market. After the derivatives market, which once ranked first in the world following a regulation in 2011, fell outside the top 10, the intention was to appoint market makers to facilitate smooth trading for investors.

If the tax exemption benefit disappears, trading costs for market investors will inevitably increase compared to now. A securities firm official pointed out, "The trading costs for risk hedging will be greater than the spread profits gained by securities firms acting as market makers," adding, "In a situation where costs increase, it is questionable which securities firm can present buy and sell quotes as meticulously as before."

Concerns are also being raised that this may conflict with the policy direction of financial authorities and the Exchange, which have emphasized revitalizing the derivatives market. The Exchange has announced plans to expand derivatives market makers and increase incentives for them through the derivatives financial products development plan. Another securities firm official argued, "Because trading is not active, market makers who can provide quotes are necessary, but if even the remaining incentives are taken away, it is like telling operators to leave the market," adding, "If the derivatives market becomes obsolete, business techniques utilizing it will not develop, causing significant side effects."

An Exchange official said, "We deeply understand the impact that the sunset of the tax exemption system will have on the revitalization of the derivatives market," adding, "We are in close consultation with the Financial Services Commission and the Ministry of Economy and Finance." Currently, the average daily trading volume of the domestic derivatives market hovers around 37 trillion won, down 45% from 66.3 trillion won in 2011.

This content was produced with the assistance of AI translation services.