Korea Exchange Surpasses 2,000 Trillion KRW in OTC Derivatives Clearing Balance

Average Annual Growth of Settlement Amount Approximately 24%

The outstanding balance of over-the-counter (OTC) derivatives cleared by the Korea Exchange (KRX) has surpassed 2,000 trillion won.

On the 4th, the Korea Exchange announced this milestone in celebration of the 10th anniversary of the launch of its central counterparty clearing (CCP) services for OTC derivatives.

Korea Exchange, Yeouido, Seoul. Photo by Jinhyung Kang aymsdream@

Following the 2009 G20 agreement, the Korea Exchange obtained a clearing license in 2013 and began clearing services for Korean won interest rate swaps on March 3 of the following year.

As a CCP, the exchange has reduced settlement volumes through multilateral netting and served as a financial market safeguard by guaranteeing settlement performance, thereby preventing the risk of a domino effect in the event of a financial institution’s bankruptcy.

The clearing volume has steadily increased, surpassing 2,000 trillion won as of the end of last month. Over the past decade, the cleared amount has grown at an average annual rate of about 24%, while the outstanding cleared balance has increased by an average of 28% per year.

In particular, the annual cleared amount of Korean won interest rate swap transactions grew approximately 24% annually, from 213 trillion won in 2014 to 1,280 trillion won last year. Since 2022, hedge transactions using Korean won interest rate swaps have significantly increased due to market volatility caused by interest rate hikes, with a notable rise in clearing of transactions with maturities of one year or less.

As of the end of last month, a total of 64 institutions, including banks, securities firms, insurance companies, and asset management companies, are participating in clearing. In the early stages of clearing introduction in 2014, domestic banks held a large share, but since 2016, foreign banks and securities firms have led clearing activities.

For foreign banks, participation in clearing increased after the exchange obtained qualified CCP certification from foreign financial authorities.

In the case of securities firms, clearing participation has continuously expanded as the CCP clearing resolved issues related to low credit ratings, and last year, hedge transactions due to interest rate inversion accounted for the highest clearing transaction share (46%).

Meanwhile, insurance companies, which have a high proportion of long-term transactions, have seen an increase in clearing volume since 2022 due to hedge demand arising from rising interest rates.

Additionally, the exchange has advanced its clearing services. In November 2015, it expanded the specifications for Korean won interest rate swaps, and in December 2016, it launched clearing for U.S. dollar interest rate swaps, diversifying its clearing products.

In June 2022, the exchange introduced a trade compression service to enhance risk management efficiency and convenience for clearing participants. Trade compression is a system that reduces the number of contracts and notional amounts through bilateral or multilateral trade adjustments targeting OTC derivatives portfolios.

Furthermore, the exchange has obtained qualified CCP status from major foreign financial authorities, promoting participation by foreign financial institutions and establishing an internationally recognized risk management framework, thereby developing into a global CCP. It has enhanced its risk management system through measures such as introducing a margin system based on maximum loss amount (VaR) in August 2016 and improving the OTC derivatives joint fund system in 2018.

An official from the exchange stated, “We will continue to expand the clearing specifications for interest rate swaps and broaden the range of cleared products to include foreign exchange derivatives, striving for the stable growth and development of the OTC derivatives market.” He added, “We will strengthen our status as an advanced CCP by obtaining qualified CCP certifications from the UK and Swiss financial authorities and continuously improving our risk management system.”

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