No Extension of Tax Exemption Benefits for Derivatives Market Makers

Ministry of Economy and Finance to Implement from April Next Year... Selective Benefits for Certain Products

[Asia Economy Reporter Minji Lee] The government has decided not to extend the securities transaction tax exemption benefit for derivatives market makers (LP) whose exemption is set to expire at the end of this year. The Ministry of Economy and Finance announced this on the 22nd through the '2020 Tax Law Amendment'.

The revised law will apply to transfers made on or after April 1 of next year. However, some products will be selectively granted tax exemption benefits through a presidential decree. In this regard, a Korea Exchange official said, "It has not yet been specified whether the tax exemption will be applied to product groups or individual items," adding, "The Ministry of Economy and Finance will make a reasonable judgment in the future."

Derivatives market makers have been exempt from securities transaction tax under Article 117-2-5 of the Restriction of Special Taxation Act. Market makers refer to 18 securities firms that increase liquidity to facilitate smooth trading in the derivatives market. They engage in sell transactions in the spot market to hedge price fluctuation risks, and at this time, they are exempt from transaction tax. After the government imposed regulations in 2011, the derivatives market shrank significantly, so to revitalize trading, it introduced tax exemption benefits for market makers. The exemption benefit was temporarily granted for three years from January 2015 and was extended once more until the end of this year.

Adieu 2019. The Year of the Golden Pig was filled with numerous tumultuous and shocking events both domestically and internationally. The battleground of the Korean financial market, Yeouido's securities district in Seoul, is lighting up even in the darkness with hopes for the Year of the White Rat, 2021. Photo by Yoon Dongju doso7@

The financial investment industry expects that the tax exemption benefit for mini futures options will be excluded by product category. According to the Korea Exchange, the total trading volume of mini KOSPI 200 futures in the derivatives market the previous day was 190,000 contracts. KOSDAQ 150 futures were 98,000 contracts, and KRX 300 futures were only 170 contracts. Dividend Growth 50 futures, composed of individual stocks, recorded 3,300 contracts, and Kakao futures recorded 180,000 contracts. An industry official said, "Typically, when trading volume is between 100,000 and 200,000 contracts, the role of liquidity providers is not greatly needed," adding, "Liquidity appears sufficient for mini products."

Concerns have also been raised that the expiration of the tax exemption benefit will inevitably shrink the derivatives market. Market makers have supplied liquidity that did not exist in the market, but if this benefit disappears, their incentive to fulfill obligations will decrease. A securities industry official said, "There is a possibility that market-making operations themselves could be paralyzed," adding, "In the long term, it could result in greater losses even from the perspective of securing tax revenue." The official added, "From the perspective of securities firms that have to bear costs, it will be difficult to present buy and sell quotes as meticulously as now," and "It would be desirable to distribute the benefits equally to all market makers until the transaction tax is abolished."