Recent announcements by the Korean government relating to the removal of the IRC system and reactivation of omnibus account trading for listed securities could deliver improvement in liquidity and settlement efficiency within Korea.
The comments were made at the recent Pan Asia Securities Lending Association (PASLA) and Risk Management Association (RMA) Conference on Asian Securities Lending, where panellists discussed Korea’s commitment to become a developed market.
Korea — which has been described as “the epitome of a market in motion” by one panellist on the ‘Markets in Motion: A markets update for the Asia Pacific Region’ session — has sought to attain Developed Market status from MSCI, according to Jisuk Kim, senior foreign attorney at international law firm Kim & Chang.
MSCI, a global provider of equity, fixed income and multi-asset portfolio analysis tools, issued a Global Market Accessibility Review in 2022, in which it identified several areas of reform for Korea to attain MSCI Developed Market status.
According to Kim, the report highlighted the shortcomings of the omnibus account trading system in the Korean market, the limited exceptions to over-the-counter (OTC) transfer of securities by foreigners, and the lack of a timeline for full resumption of short selling in the Korean market.
“FX market liberalisation is one such area [for reform] as there is currently no offshore deliverable KRW market. Also, constraints exist in onshore currency market trading — they noted the need to improve foreign participation in the KRW FX market,” Kim explained.
The report also drew attention to the lack of English language disclosures available to foreign investors and the requirement to obtain a foreign investor ID to trade in Korean listed securities, commonly known as the IRC regime — “which is viewed to be quite cumbersome”, according to Kim.
The IRC regime, otherwise known as an Investor Registration Certificate (IRC), contains a unique identification number for each foreign investor, including the investor’s name, date of birth or establishment, nationality and type of entity.
This IRC number must be quoted whenever a foreign investor places a purchase or sell order via a broker, and the securities safekeeping account number, linked to it, must be quoted whenever a foreign investor conducts settlement at a local custodian bank, according to Clearstream.
Following these recommended steps, the Korean government recently indicated that it intends to lower the barrier to foreigners trading in Korea’s market.
In removing the IRC system, IRCs will be replaced with existing Legal Entity Identifiers (LEIs) — thereby removing the need to apply for an IRC to trade in Korea, stated Kim. Individuals, however, will be able to use their passport numbers as their identification documents.
Plans to reactivate omnibus account trading for listed securities are outlined in this proposal. That regime was introduced in 2017, according to Kim, but “for various operational reasons it never kicked off”.
However, market participants are left with many questions on how this is going to work in operation. According to Kim, a number of industry participants have questioned whether omnibus account-based securities lending will be possible.
The answer remains unclear but Kim advised that this idea “should be voiced by the industry as a need that exists”.
For Sean Greaves, managing director and chief operating officer, APAC at State Street Global Markets, announcements heralding the removal of the IRC system and adoption of omnibus accounts brings much excitement to the industry.
“The reality is that we need to find out what this actually means and what this will require,” Greaves advised. “Those details are still lacking at this point, but those details will probably arrive over the next 12 to 18 months. Keep your LEIs close, but keep your IRC closer for the time being.”
According to Greaves, there is a sense of expectation that use of omnibus accounts could lead to greater operational efficiency, not just on the lending side but, potentially, also on the collateral side.
A number of questions remain for participants regarding what this would mean for the reallocation of loans between LEIs and what the documentation would look like.
Significant structural reforms are also planned to the Korean FX market. This includes extending the FX market trading hours to 02:00 Korea time to align with the London market’s closing hours and allowing registered foreign institutions to participate in the domestic Korean FX market. In addition, the government aims to promote the use of electronic trading in Korea’s FX markets and to allow aggregators to provide brokerage services.
