What does the future hold for South Korea’s securities lending market?
Asia offers a diverse range of securities lending markets, which all vary in their stages of development. But in recent months, South Korea has been feeling the struggle.
At last year’s PASLA/RMA Conference on Asian Securities Lending, Seoul-based market representatives voiced concerns that the hardening of short selling rules in South Korea through 2016 to 2017 would negatively affect their business—and now it appears their worries were not without merit.
South Korea was one of the most lucrative Asian markets for securities lending from 2015 to 2017. Local investors only accounted for 20 percent back in 2011, but in early 2017, that percentage hovered around 35 percent on average, with local investors increasingly taking on a larger command of the market.
However, recently the walls have come crashing down, as stock loans in South Korea tumbled about 24 percent over last October.
In a Trend Analysis release, published by the Korea Financial Investment Association (KOFIA) in October 2018, KOFIA indicated that the Korea Composite Stock Price Index (KOSPI) had closed at 2,029.69pt before falling to a yearly low of 1,985.95pt as a result of mass selling by foreign investors.
KOFIA said: “This was triggered by concerns of economic recession due to decreasing global trade volume from the prolonged US-China trade war and volatile global stock prices on top of continuing US interest rate hikes.”
It added: “Meanwhile, tumbling US stocks weighed down on the stock markets of other major economies, which also negatively impacted Korea’s stock prices.”
As a result, the net asset value of domestic equity funds dropped by Won (KRW) 6.4 trillion, despite a slight inflow of capital.
KOFIA also found outstanding margin loans came in at 9.04 trillion won (US $8.06 billion) as of the start of November, down 23.8 percent from 2 October.
Margin loans taken to buy stocks traded on the main KOSPI market plunged 21.1 percent to 4.71 trillion won, while those for shares registered with the tech-heavy, secondary KOSDAQ market tumbled 26.4 percent to 4.33 trillion won.
But it’s not all doom and gloom, DataLend indicates that South Korea is still the fourth largest market in the Asia region by on-loan and inventory value.
As of 12 November, there were still approximately 2,200 securities on loan on any given day, the vast majority of which (over 90 percent of the total) were equity securities, according to DataLend, the securities finance market data provider.
DataLend also found the average daily on-loan balance so far this year (as of 12 November) stood at $14.80 billion on loan/day, while equities were at $14.36 billion and fixed income stood at $439.85 million.
As Paul Solway, regional head of securities finance, Asia Pacific of BNY Mellon, comments: “Receivers are keen to accept Korean equities as another way to secure loans/repo trades, and Korean Treasury Bonds are emerging in financing desirability among borrowers.”
Broadly speaking, Solway adds: “Institutions are increasingly looking into how to automate their trading functions to simplify workflows and reduce operational risk. There are ample opportunities to drive pre- and post-settlement efficiencies in Korea and across the rest of Asia.”
Seoul relative
Despite the slight scare in October last year, custody clients and the international community are still favouring South Korea, and collateral has its opportunities there too.
As Darren Boulos, head of foreign exchange (FX), Asia Pacific, at BNY Mellon, says: “South Korea is a strategically important country for [BNY Mellon] custody clients and the international investment community. It captures some of the largest investment flows among the restricted markets BNY Mellon serves.”
As Solway indicates, in the Korean market “pharmaceutical companies, [as well as] marine transportation, technology and heavy industrial/manufacturing sectors continue to dominate specials activity”.
This is mirrored by Sam Pierson, senior director, at IHS Markit who states: “Celltrion and Celltrion Healthcare have been most popular, [at the end of 2018] there was some more demand for Samsung and affiliates into earnings, with Samsung electro-mechanics seeing a surge in borrow demand.”
However, Solway warns: “South Korean economy is growing only gradually, with GDP slightly below expectations. Fiscal and economic policy developments in the coming months could cause investors on the long and short side of the market to change their market positioning.”
And as for collateral, Natalie Wallder, markets head of collateral management at BNY Mellon, explains: “Challenges will undoubtedly present themselves in relation to the industry mobilising eligible collateral to manage regulatory changes, such as the need to segregate margin for over-the-counter derivatives.”
But she states: “Such challenges, however, can turn into opportunities where the market expands its range of eligible collateral to include other high-quality liquid assets (HQLA) and creates more seamless solutions to use onshore securities.”
A question of regulation
Regulations governing securities lending are more global in nature, according to Solway, but he states they are driving opportunities across the marketplace.
He adds: “Markets like Korea and Taiwan continue to be very rules-driven and transparent on the short side. Some participants believe this could set the standard for other markets in future, whereby local intermediaries form part of the ecosystem that allows for reporting to exist at a granular level via the central exchange or depositary.”
“As we have seen, this transparency requirement is the driver of more recent regulations such as the Securities Financing Transactions Regulation in Europe.”
“This, in turn, should bring new trading counterparties to the market who are looking to transform cash assets into HQLA. It also creates more of a need for institutions who hold Korean assets to further finance them.”
Solway predicts that the financing market will continue to evolve in the near term. This, he says, “is where triparty agents can assist to mitigate operational and settlement risk for borrowers and lenders”.
Neighbours
Where China is concerned, trade tensions with the US could have a knock-on effect when predicting future successes in the Asia Pacific region.
However, David Braga, head of Australia at BNP Paribas Securities Services, notes: “China [is] generating the most interest and demand. We have built a robust product offering to support clients’ investment ambitions in China.”
Elsewhere, Singapore has evolved and is now seen as an active financial hub for Southeast Asia and globally.Singapore’s advanced technological infrastructure has been a strength and the city-state remains in a prime position to help increase Asia’s securities lending market.
As Solway indicates: “Securities lending across Asia continues to develop and grow.”
“The Philippine and Indonesian local bourses are both revisiting their domestic short-selling mechanisms that in turn will require facilitation from viable securities lending platforms that can support both local and offshore participation. As always, China remains a market that the whole industry is keen to see open up beyond the existing restrictions that disqualify many firms from securities lending.”
