In a region where securities exchanges are nationalistic and wary of consolidation, the Korea Exchange (KRX) has burst past its own borders. Offering expertise, experience and reliable technology to smaller exchanges, KRX is building a global brand. With that it is bringing new opportunities for both international investors and emerging economies.
By Waters 23.10.08 by Laura Hilgers
Countries like Mongolia, Cambodia and Laos are hoping that a relationship with the larger exchange will attract more liquidity, more foreign investment and ultimately help build more robust capital markets. In turn, as the KRX moves into Asia’s smaller economies, experts say investors will begin to see easier access and improved trading platforms on these smaller exchanges, which will offer a new range of investment opportunities.
Korea itself faces challenges on the home front, where
a decline in the nation’s growth rate could limit investment
opportunities. “It makes a lot of sense to look abroad for growth
opportunities,” Katkov says. “Korea is shaping up to play a very big
role in emerging South East Asia, and not just in the financial
industry.”
BIG OPPORTUNITIES IN NEW MARKETS
In Cambodia and Laos in particular, the KRX is getting into the game
early. The two countries are looking to Korea for assistance in
creating entirely new exchanges, to be launched in 2009 and 2010,
respectively.
The KRX is taking an undisclosed stake in each exchange, through
joint ventures with the Cambodia Ministry of Economy and Finance, and
the Bank of Lao PDR. “The KRX has been searching for the business
opportunities with those emerging economies since its inauguration in
January 2005,” says Pat Gil-Soo Shin, senior vice president of global
business development at the KRX. Investment in Cambodia came first in
May 2006, with the Laos venture close on its heels in early 2007.
In Cambodia, the KRX is also providing a grant of $1.8 million for
the securities market project. In exchange, Cambodia and Laos will
benefit from the KRX’s experience and reputation among foreign
investors. “Smaller economies usually lack ability to build their own
capital market in both human and IT resources,” Shin says. “Even with a
stock exchange, they usually face difficulty in promoting the market to
have enough liquidity and trustworthy infrastructure, including IT and
rules and regulations.”
In the first stages of the joint ventures, the KRX is engaged
primarily in education and advisory programs. Currently, the two
countries are still in the process of designing rules and regulations
and considering what they will need in terms of IT infrastructure, Shin
says. “For the Cambodian and Lao markets, we are discussing the scope
of the IT infrastructure development,” he says. “We will consider both
the market’s need and the economic aspects of the country.”
While it is still unclear what these trading platforms will look
like, Katkov says that simply inviting Korea’s involvement indicates
the exchanges have the ambition to attract international investment. “I
think it’s a very good move for the local exchanges, and a way of
putting in technology for the first time in a world-class manner,” he
says.
BUILDING UP MONGOLIA
Unlike Cambodia and Laos, Mongolia has been running its exchange for
17 years. In a country better known for its grasslands and ponies than
its financial markets, the Mongolian Stock Exchange (MSE) still ranks
among the world’s smallest. The MSE remains, at least for now, far from
the minds of most international brokerages as they move into Asia. The
exchange, however, is looking to do better. That is where Korea enters
the picture.
“The Mongolian government and the Mongolian stock exchange asked the
KRX to support them to modernize the stock market via educational and
advisory programs,” Shin says. “We are now discussing revising the
rules and regulations to help revitalize the securities market and pull
liquidity.”
At the MSE, revising the regulatory structure updating the
exchange’s trading platform will be the first of many steps in
attracting international investment. “The current system that is
running is way too old,” says Temuulel Lkhegza, international relations
officer at the MSE, of the exchange’s trading platform. “The main aims
of this project are to get everything automatically done and get
everything online.”
The MSE was originally started to enable the privatization of the
Mongolia’s state-owned businesses. In theory, every Mongolian citizen
was to get shares in the newly tradeable Mongolian companies. Over the
years, however, stock ownership has sifted down to only a select few.
Partly due to its unusual history, Lkhegza says, many of the 380
companies listed on the exchange are not actively traded.
“Most of the stocks in these companies are concentrated in a few
hands,” Lkhegza says. “That is why the stock market is not very
active.” As part of reforms, the MSE is looking at de-listing some of
the companies that don’t match its standards.
By the end of 2009, Lkhegza hopes to see an exchange on which
investors can participate and trade remotely through the Internet, and
where liquidity is building. The MSE is currently putting together the
financing for the project, which is expected to cost $7 million. “The
training phase of the project has been completed,” Lkhegza says. “We
have negotiated the system overview and the structure of the system; we
are waiting on the next stage.”
THE TECHNOLOGY EDGE
While Shin says the advisory role that the KRX is playing in these
tie-ups is important, it is the exchange’s technology, he says, that
seals the deal.
“The IT investment in those developing markets enables the KRX to
secure stakes of those markets,” Shin says. “It helps the KRX to own
interest in the regional stock exchanges.”
It accomplishes most of this through the Korea Securities Computing
Corp. (Koscom), which was established in 1977 by the KRX and Korea’s
Ministry of Finance. Koscom was originally created to serve securities
firms, and also sells back-office systems and market information
systems. “That’s 40 percent of the market for securities firms in
Korea,” Katkov points out. In addition, Koscom has been operating the
KRX trading system since 1988.
More recently, Koscom inaugurated a bond-trading platform developed
for Bursa Malaysia in February. “Bursa Malaysia put an international
auction to build an electronic trading platform for the bond market in
2006,” Shin explains. “The KRX won the auction.”
From the perspective of Bursa Malaysia, it makes sense for the two
exchanges to collaborate, says K. Sree Kumar, head of market and
product development at the Bursa Malaysia. “Bursa Malaysia does not see
KRX as a competitor,” he says. “In fact, it is in the best interest for
both Bursa Malaysia and KRX to exchange information and experiences for
the further development of the capital markets.”
There are advantages to choosing a technology partner from another
Asian exchange, Kumar says, including a minimal level of currency risk,
effective cost and similarities in working culture. “Each exchange
plays a different role in the global markets,” he says. “As such,
linkages like Bursa Malaysia and KRX can capitalize on each other’s
strengths.”
The KRX is claiming space in Asia before competition heats up from
international IT vendors, particularly those connected to other
exchanges worldwide. “They’re there first,” says Katkov. While the New
York Stock Exchange (NYSE) has sold technology in Tokyo, it has not
pressed further into Asia. By moving in early, the KRX can get toeholds
in the security exchanges as well as with the brokerages that trade on
those exchanges.
In Malaysia, Katkov says, “the number of securities firms is growing
and it is growing quickly.” Whereas there are local vendors already
selling back-office technology, the expansion of the industry is
providing opportunities for other vendors to step in.
And the more opportunity, the better, says Shin. From Mongolia in
the North to Malaysia in the South, Korea’s investments will secure the
country’s place as a global player, he says. Through technology sales
and strategic tie-ups, he says that the KRX is moving to become “a
financial hub in the Asian capital market.”
