KGI Securities (Thailand) has projected 150-per-cent growth in the total transaction value of its over-the-counter (OTC) derivatives this year, from Bt1 billion to Bt2.5 billion.

Naruemol Artamnuayvipas, senior vice president of KGI Securities (Thailand)'s Equity Derivatives, said the company's confidence had been partly boosted by the withdrawal of competitors like foreign banks from the market after the Bank of Thailand introduced the 30-per-cent reserve requirement.

KGI, the only local brokerage that offers OTC derivatives products, recorded a total transaction value of nearly Bt500 million in 2005, when it began operations, and doubled that in 2006.

This year, apart from its readiness in personnel, systems and know-how support from its parent company in Taiwan, the company's prospects are buoyed by the market sentiment, Naruemol said.

"The variety of derivatives tools can give a principal guarantee and satisfactory return to investors, whether the market is bullish or bearish," she said.

"We began to implement the system and set up the team five years ago. Two years ago we started the operation. We are now recognised. Existing competitors like foreign banks are now stepping back in the wake of the BOT's withholding measure. For newcomers, it will take quite a while, probably five years, to be as ready as we are today," Naruemol said.

Before the BOT introduced the withholding measure on December 19 last year, both KGI and some foreign banks offered OTC derivatives products to institutional investors. These OTC products have no relation to the Thailand Futures Exchange (TFEX)'s SET-50 product.

KGI and the banks created their own derivatives products. Each product had only two parties, the derivatives-provider and the customer. Each product is tailored to the customer's demands, and investors can choose to go short or long.

For example, institutional investor A wants to hedge PTT stock with one of KGI's call options. A chooses the price and the period of time it wants to hedge. KGI then calculates the premium charge. If agreed, the risk of PTT's stock-price fluctuation is transferred to KGI. KGI then has to manage its risk by shorting or selling the PTT stock in order to cover its risk.

Naruemol said KGI's traders were key to the firm's results, so they were paid high salaries.

"Foreign banks have to hire traders from overseas, like Hong Kong or Singapore, to monitor stock prices, so their personnel cost is higher than ours. Their trading fees are different from ours as well, because we are a local company. Last but not least, the BOT's withholding measure forces them to park 30 per cent of investment when they either bring money into the country or pull it out," she added.

In TFEX, there is one product, SET50, available. The product is traded with TFEX as the middle man to match the contracts.

As the Securities and Exchange Commission allows only institutional investors to invest in OTC derivatives products, KGI will join up with two local and three foreign banks and 15 affiliate asset-management firms to form its sales force.

KGI will act as the derivatives-product provider. The banks and asset-management firms will create their own products that can be linked to KGI's derivatives products and sell them to retail investors.

Separately, KGI plans to launch two derivative-warrant (DW) products worth Bt400 million-Bt500 million each in the third and fourth quarters this year.

Naruemol said KGI would pick one of the top five SET-50 stocks to create the warrants. Earlier, there was an attempt to create warrants by another party that was not the owner of the company. The attempt was dropped as the SET at that time did not allow the warrant-buyers to convert the warrants into ordinary stock in the stock market. However, KGI has spoken to the Thailand Securities Depository for assistance on this issue.

KGI will have to buy enough shares of the stock on which it wants to issue the warrant to match the number of shares to be exercised after the warrant expires.

The Finance Ministry once years ago offered a DW of Siam Commercial Bank.

Piyarat Setthasiriphaiboon

The Nation