Securities finance profile: South Korea 2016

Securities finance profile: South Korea 2016

6SBL 

South Korea was one of the main drivers of securities borrowing and lending (SBL) revenue in Asia in 2015 – producing the biggest year-onyear percentage increase in the region according to Markit. While Hong Kong also managed to grow its yearly revenues by over $60m last year, the accomplishment is more impressive for South Korea as it represents a doubling of its aggregate annual revenue. 

Madalin Prout, head of relationship management APAC securities finance and processing at SunGard, says South Korea is mainly driving returns through specials: “In the last two years, South Korea has overtaken Taiwan, in terms of both loan volume and lending revenues, to become the third largest market in Asia .

Data korea


Under Korea’s system, the borrower and the lender choose the type of transaction and enter application details into the web-based KSD (Korean Securities Depository) SBL system. A trade is matched when the application details of the lender and the borrower are met on issues, quantity and fee rates among other metrics. 

Borrowers deliver collateral in cash or securities to KSD or the lender. After this, securities are directly transferred by book-entry from the lender’s account to the borrower’s account. More than 4.5 billion shares were traded this way during 2015, according to the KSD, up from around 2.8 billion in 2011. 

The Chinese economic slowdown has consistently presented opportunities in Asia generally, but they are concentrated in South Korea and Hong Kong. 

A new type of market participant has entered the Korean SBL market according to Prout: “The local entities of Chinese securities houses are increasingly gearing up to enter or increase their SBL activities. It is particularly evident in Hong Kong but it is also the case in South Korea, albeit at an earlier stages in the process.” 

South Korea operates on a pseudo-CCP model in respect of the requirement for SBL to be intermediated by the KSD, Korea Securities Finance Corporation (KSFC) or a local broker as prescribed by local law, observes Dane Fannin, head of securities lending Asia-Pacific at Northern Trust. 

“Although at the outset the framework was unique it works well, though the punitive rules associated with the failure of long sales under a securities lending arrangement remain unclear,” he says. “This potentially has an unintended consequence of liquidity reduction as inventory providers seek to maintain overly conservative buffer policies.” 

Additionally, there are nuances in terms of processing various types of corporate action event for SBL that are peculiar to the market, some of which require blanket recalls on positions in order to protect beneficial owner entitlements. These can have an impact on market liquidity particularly for hard-to-borrow securities. 

From a lending perspective, given the market’s segregated account structure, lender assets cannot be comingled and hence clients do not enjoy the pooling benefit that typically exists in omnibus account structures. 

Fannin says there has been increased demand for Korean large cap inventory recently given the country’s macroeconomic exposure to a slowing Chinese economy, coupled with lower oil prices and a challenging exchange rate environment. These themes have encouraged investment for a number of directional strategies, the growth of which has also been supported by a growing domestic hedge fund industry. 

Further ahead, there will be a minor change in relation to investment registration certificates that will see omnibus investment registration certificate (IRC) numbers allowed by funds. This is expected to come into effect sometime next year, says Martin Corrall, regional product head for securities finance Citibank & chairman of Pan Asia Securities Lending Association. 

Repo 

The Korean repo market is divided into the exchange market, launched in 2002 by the Korea Exchange (KRX), and the OTC market, where counterparties transact directly or through an intermediary. The OTC market is further divided into institutional repo, customer repo and Bank of Korea (BOK) repo. 

Eligible repo securities include any kinds of bonds excluding commercial paper, certificates of deposit and ETFs. KSD performs daily mark-to-market of securities for repo and may require participants to post additional margins. When a repo is terminated, the KSD returns any margin involved. 

Thomas Murray Data Services notes that since foreign participants have difficulties in exercising rights and fulfilling duties, KSD regulates that foreign participants must appoint standing proxies for their repo transactions. Foreign participants are required to register their personal details in advance. 

Synthetics 

In 2011, the Korean Financial Services Commission (FSC) introduced a comprehensive framework for the sector for the first time, designed to promote domestic trading of leveraged derivative instruments. 

Since then, prime brokers have continued to enhance their synthetic offerings to handle a gradual upswing in trading activity and business volumes. Meanwhile domestic firms, with relatively simple operational needs, continue to dominate the Korean hedge fund market. 

“There are essentially five top securities firms in Korea, which creates very strong competition for new business,” said Kyung-Ha Lee, managing director at KDB Daewoo Securities, in a recent MISYS research report. “If existing players are going to make the most of new market opportunities, they need to differentiate themselves by providing hedge funds with more attractive offers.”