The Asian Securities Industry and Financial Markets Association (ASIFMA) launched a white paper entitled “Korea Capital Markets 2022 and Beyond: Opportunities and Challenges” for global institutional investors seeking to invest in South Korea’s capital markets and to offer constructive recommendations.
“The Korean market not only enjoys a significant role within Asia but has within recent decades stepped up to become a major global player,” said Lyndon Chao, managing director and head of Equities and Post Trade at ASIFMA, in a statement. “The advancement of Korea’s real economy over the past two decades has been nothing short of phenomenal, firmly establishing Korea as a leading exporter of technology as well as of culture to markets all over the world. Global investors are keen to invest more in Korea, searching for opportunities as they de-risk in other APAC countries due to growing regulatory uncertainty.”
Three key recommendations are being made in the white paper:
- Information Flow and Regulatory Guidelines
- Top Broker Leaderboard and Block Trading Mechanism
- Foreign Exchange
Securities lending:
Last year, there has been a partial lift of the short sales ban, as well as recent measures to improve regulatory oversight of securities lending. With new controls in place to better manage market volatility and to minimize abusive practices, a full lift of the ban will hopefully follow ASIFMA wrote.
Active fund managers who employ market-neutral long-short strategies continue to remain on the side lines until a broader range of securities eligible for securities lending become available to support their trading strategies. Further, uncertainty over what constitutes legitimate trading activity has led many global firms to suspend market-making businesses in Korea which have historically helped to provide liquidity to the market.
“We recommend further lift of the short sales ban for more efficient pricing and liquidity for the market, as well as continuing to attract foreign investment. We also suggest that ASIFMA and the Pan Asia Securities Lending Association (PASLA) members be given the opportunity to provide feedback on behalf of foreign investors before new rules are implemented. As for the reporting threshold, we believe it can be increased, to 0.2% for instance, in order to ease the burden on market participants,” ASIFMA wrote.
Collateral
As cash collateral has become increasingly scarce, participants have focused on the ability to utilize non-cash inventory (e.g., securities and treasuries) to cover their margin obligations. Furthermore, a key characteristic of developed markets around the world is the presence of an efficient repo and securities lending and borrowing (SLB) scheme, which are often leveraged by investors to manage their capital requirements. SLB transactions in Korea are often used to support offshore financing transactions by foreign institutions where Korean securities are posted as loan securities, and such transactions are intermediated by Korean intermediaries.
“A more detailed review to broaden the scope of application of omnibus account structures would help increase access to the Korean market by foreign institutions and use of KTBs and MSBs as collateral for financing transactions. If global custodians and sub-custodians were allowed to utilize true omnibus accounts (instead of the IRC based segregated accounts), such feature would allow for much greater participation and increase the liquidity for the Korean financial market,” wrote ASIFMA in the report.
Securities collateral re-use
There are largely two ways of posting Korean securities as collateral depending on the type of securities and the transaction type: 1) pledge ) or 2) title transfer of collateral by way of securities lending.
“Removing the operational hurdles for holding of securities via an omnibus account structure for the purpose of posting collateral through SLB transactions or as margin would allow much greater liquidity for Korean Treasury Bonds (KTBs) and Monetary Stabilization Bonds (MSBs). Additionally, ASIFMA recommends that the legally and operationally permissible reuse of KTBs and MSBs posted as Title Transfer Collateral be further expanded from the currently permitted scope to give market participants the ability to reuse KTBs and MSBs as collateral more effectively, which will contribute towards enhancing the liquidity of KTBs and MSBs. Limitations in setting up security interest and collateral management are cited as one of the key factors which make active participation in the Korean market difficult for foreign investors. We request that the regulators, the KSD and ASIFMA along with its members discuss ways to promote more active usage of the KTBs and MSBs.”