1. 3-Year KTB Futures Success Factors & Outlook 2003 Taipei Interest Rate Futures Conference November 20-21, 2003 Jungho Kang, Ph.D Korea Futures Exchange

2. I. Market Overview II. 3-Year KTB Futures Market III. Underlying Market IV. Key Features V. Success Factors VI. Outlook

3. I. Market Overview - Growth 0 2,000 4,000 6,000 8,000 10,000 12,000 1996199719981999200020012002 Jan~Oct. 2003 3 43 171 395 898 3,521 7,920 11,691 (in 1,000 contracts) 3

4. I. Market Overview – Key Products (Figures: Jan.~ Oct. 2003) ContractsTotal Trading Volume Average Daily Trading Volume KOSPI200 Options2,344,34911,380 KOSPI200 Futures 52,956 257 3-year KTB Futures 8,756 43 USD/KRW Futures 1,239 6 KOSDAQ50 Futures 642 3 (in 1,000 contracts) 4

5. II. 3-Year KTB Futures – Volume Growth Total VolumeAverage Daily Volume 1999 295,833 1,671 2000 1,538,507 6,305 2001 9,323,430 37,900 200212,777,991 52,680 Jan~Oct. 2003 8,755,732 42,504 (in contract) 5

6. II. 3-Year KTB Futures – Global Status (Source: FIA, January~June 2003) (in 1,000 contract) RankContract(Maturity)VolumeExchange 1Euro Bund(10)129,320Eurex 2Euro Bobl(5) 78,297Eurex 3T-Note(10) 66,531CBOT 4Euro Schatz(2) 59,605Eurex 5T-Note(5) 33,204CBOT 6T-Bond(30) 30,452CBOT 7T-Bonds(3) 9,190SFE 8KTB(3) 5,452KOFEX 9Long Gilt(10) 4,883Euronext-Liffe 10JGB(10) 4,501TSE 6

7. II. 3-Year KTB Futures – Users (I) Institutions 85.8 Individuals 6.1 Foreigners 8.1 Institutions 76.9 Individuals 21.1 Foreigners 2.0 7 ( in %)

8. II. 3-Year KTB Futures – Users(II) User TypeInstitutions2000Jan~Oct. 2003 InstitutionsFCMs 12.5 17.4 Securities Companies 14.6 13.5 Banks 27.5 32.5 ITCs 15.2 20.0 Insurance Companies 1.4 1.3 Other Financial Institutions 1.9 0.4 Other Corporations 3.8 0.7 Total 76.9 85.8 Foreigners 2.0 8.1 Individuals 21.1 6.1 Total 100.0 (in %) 8

9. II. 3-Year KTB Futures - Specification Underlying Asset3-year Treasury Bond(8% coupon rate) Trading Unit KRW 100 million( ≒ USD 85,000) Contract MonthsThe first two consecutive months in the quarterly cycle(March, June, September, December) Price QuotationKRW 100 nominal value, to two decimal points Minimum Price Fluctuation0.01, representing a value of KRW 10,000 Last Trading DayThe exchange trading day immediately preceding the final settlement day Final Settlement DayThird Wednesday of the contract month Settlement MethodCash settlement 9

10. III. Underlying Market - Overview Various government measures to promote the government bond market → considerable rise in KTB trading volume over the past few years Improved liquidity → simplified the types of government bonds and focused on KTBs Screen-based, electronic trading market for government bonds(IDB, October 2002) → steep increase in exchange- traded volume 10

11. III. Underlying Market - Primary Maturity2000200120022003 1-year KTB 3.4--- 3-year KTB 9.2 8.5 7.611.5 5-year KTB 1.8 8.8 5.610.1 10-year KTB 0.8 4.6 6.2 7.3 Total15.221.919.4 28.9 (in trillion won) (Source: Ministry of Finance and Economy) (1)The government stopped issuing 1-year KTBs as part of measures to lengthen maturities of government bonds. (2)The January-October volume plus the planned issue amount 11 (2) (1)

12. III. Underlying Market- Secondary 200020012002Jan.~Sept. 2003 OTC 432.0451.9357.9398.1 Exchange 1.9 8.9 39.5165.4 Total 433.9460.8397.4563.5 (in trillion won) * Source: Korea Securities Dealers Association(KSDA), Korea Stock Exchange(KSE), Korea Securities Computer Corp. 12

13. IV. Key Features – Cash Settlement Low liquidity → price manipulation such as “short squeeze”. The government plan to balance the budget(1999) → future liquidity concerns Monthly issue → disperses liquidity Oligopolistic secondary market → market manipulation(a few ITCs and banks have significant market control) Irregular issuing practices(1999) → predictability issues 13

14. IV. Key Features – Basket System Basket system was adopted to come up with fair final settlement yield. Final settlement price is determined, based on the average yield of a basket of selected treasury bonds. KOFEX designates a basket comprising a single or multiple number of bonds prior to the listing of a new contract and the basket remains fixed until the expiry date of the contract. 14

15. IV. Key Features – Final Settlement Price(I) Primary Dealer KSDA * Korea Securities Dealers’ Association KOFEX 19 primary dealers quote yields of the component bonds in the basket at 10:00, 10:30, 11:00, 11:30 AM. Excluding the highest and the lowest five quotes, KSDA calculates the simple average yield for each bond at each fixing time. ① mid value of the first three fixing values at 10:00, 10:30, 11:00 AM ② average value of ① + fixing value at 11:30 AM ③ average yield( ② ) → final settlement price Primary Dealer 15

16. 16 IV. Key Features – Final Settlement Price(II) Bonds10:0010:3011:0011:30 A6.218%6.217%6.213%6.215% B6.155%6.153%6.148%6.149% C6.845%6.840%6.835% Fixing Value6.406%6.403%6.399%6.400% Series Name : KTB312 Last Trading Day: Dec.16 2003 Average Yield: 6.402% Settlement Price: 104.33 Average (1)Of the 19 quotes received for a bond, the top and bottom five quotes are excluded and the remaining 9 quotes are averaged. (2)mid value of the first three fixing values at 10:00, 10:30, and 11:00 AM (3)The final settlement yield = average of the mid value(2) and the fixing value at 11:30 AM. Rounded up to three decimal points. (2) (3) (1)

17. V. Success Factors - Product Design √ Cash settlement → reduces possibility of market manipulation such as short squeeze and provides easy market access √ Specification → designed to best reflect the underlying market conditions and to meet the needs of market users - contract size: 100 million won(face value of KTBs) - underlying asset: 3-year KTB → in tandem with the shift of the benchmark to 3-year KTBs from 3-year corporate bonds 17

18. V. Success Factors – Market Conditions √ Increased bond issue → increased liquidity - issue amount: 6.8 trillion won in 1997 → 34.6 trillion won in 2002 √ Low interest rate trend from H2 2001 → rally in bond market √ Flight to quality → risk-free treasury bonds in high demand due to unstable financial market conditions √ Fungible issue → increase liquidity of underlying bonds(more efficient price discovery: easier to find fair value of underlying bonds) 18

19. V. Success Factors – Government Actions √ The government increased bond issue and began to issue bonds regularly → enhanced market predictability √ Primary Dealer System(July 1999) √ Marking-to-Market System(July 2000) → increased hedging demand √ Screen-based secondary bond market(IDB)(October 2002) → greatly increased exchange-traded volume & market transparency 19

20. VI. Outlook √ Good growth potential: Korea’s government bond market is still at an early stage of development. - Increased awareness of risk management → potential hedging demand - The government’s commitment to foster the bond market √ Synergies with other interest rate products √ Foreign participation is anticipated to increase once the Korean government bond is designated as “exempted securities” (plan) 20

21. 21 Thank you