By Kim Yon-se
Staff Reporter

Financial regulators have launched an investigation into derivatives trading by local banks and foreign banks operating here.

The probe started after it was discovered that a few banks, including foreign banks, have increased business in an unusual way during a short period of time and a bribery scandal involving derivatives traders erupted.

``We will check whether banks arranged derivatives deals within the pre-set ceiling,’’ said Chang Byong-koo, an official of the Financial Supervisory Service (FSS).

The probe also started as prosecutors are looking into dealers of the Deutsche Bank Korea and the National Agricultural Cooperative Federation (NACF) on suspicion of unfair trading over the past few years.

He said derivatives are important financial tools to protect corporate borrowers and traders from currency, interest and other financial risks. But the problem occurs when employees misuse internal information to seek personal gain through collusion with brokers.

FSS official Kim Seok-young said most foreign banks here are enjoying high commission income from the derivatives business after SK Networks’ accounting scandal in 2003.

Citing KTX, which traded with the Deutsche Bank in Korea over the past few years, as an example, he said the company needed to minimize risks as it has borrowed foreign currency on the basis of long-term maturity. But bribery has taken place among traders and brokers, he added.

The nation’s bullet train company KTX started its business in 1992.

Many of the 33 foreign banks in Korea specialize in derivatives trading and more and more local companies are turning to their products. A number of dealers said many foreign banks, especially European banks, have staked their business on derivatives trading as they lose competitiveness in the trading banking business in Korea.

In the process, many dealers have paid little attention to the trading rules out of desperate attempts to realize their target, to which their bonuses are linked, they said.

A source said a few foreign banks have yet to establish strict internal monitoring system on the derivatives trading.

According to FSS officials, an FSS deputy governor has ordered banking inspectors to conduct overall inspections of the business of banks and to hold workshops to help bankers and corporate treasury managers alert themselves better to risks and opportunities of the hedge instruments.

The 33 foreign banks operating here generated 192.1 billion won through derivatives during the first half of the year, equivalent to 60 percent of their total earnings of 318.9 billion won.

The market share of these foreign banks stood at 1.6 percent in the derivatives market on the stock market and captured 50.4 percent in market share on the over-the-counter derivatives market as of June.

``The products on the over-the-counter market are specialized in diversified contracts between customers and banks,’’ an FSS official said.

kys@koreatimes.co.kr