Korean ETF issuers ready new synthetic wave

Issuers of exchange-traded funds in Korea are busily preparing for the introduction of synthetic replication, with the regulator set to announce guidelines for implementation this June.

In that sense Korea is headed in the opposite direction to much of the rest of the world, given that swaps-based replication has kicked up such a storm of protest owing to the absence of underlying physical assets and potential for counterparty risk.

“I think all ETF providers in Korea are preparing for swaps-based ETFs,” says Sah Bong Ha, ETF team head at Samsung Asset Management.

Samsung AM met representatives from Korea Exchange on March 13 as part of an industry-wide consultation process. Rules are due to be announced by the end of May.

“We are researching because we do not know what the regulatory changes will be,” states Ha. “We are studying what the appropriate index is for synthetics and we are listening to the opinions of banks and securities companies.”

Korea’s incoming suite of synthetic ETFs will likely solely track overseas indices, with the Financial Services Commission (FSC) having stipulated that issuers should only pursue the synthetic route if physical replication isn’t an option (i.e. counting out the domestic market).

The expectation is that institutional appetite will drive initial demand, given that products tracking overseas indices would fit their asset allocation goals.

Kim Hyun Vin, manager of Korea Investment Management’s ETF strategy team, indicates that the firm wants to launch a couple of synthetic products as soon as this June, pending regulatory approval.

“We will be a first-mover, we have been preparing for synthetics for a year,” he says. “We have soft partners in place and have set up our processes, so we are all set.”

The most likely areas of exposure would be global and emerging markets. “There will be a lot of demand,” he suggests.

The FSC is eager to create greater investment choice. At present, 80% of products track the Korea Exchange but only a sprinkling link to overseas benchmarks.