South Korea
24 July 2012
An export slump has hit South Korea’s economy, but the country is hopeful that focusing on stability will get it back on track, as SLT finds out
Image: Shutterstock
The economies of Asia are not immune to the financial problems facing Europe and the US. The Bank of Korea cut South Korea’s interest rate by 25 basis points—from 3.25 percent to 3 percent—on 12 July in response to the country’s economic growth weakening “more than originally anticipated, with the rates of growth in exports and domestic demand remaining at low levels.”
In a statement, the Bank of Korea added: “[We anticipate] that the domestic economy will sustain a negative output gap for a considerable time going forward, due mostly to the increase in euro area risks and the sluggish economies of its major trading partners.”
Many Asian countries have export-orientated economies that rely on the business of trading partners such as the US and countries in the EU. With those economies struggling, and growth in emerging markets continuing to slow, “mostly on sluggish exports”, the Bank of Korea decided to act to ensure stable economic growth.
Name of the game
Ensuring sound economic growth is something that is reflected in the country’s attitude to securities borrowing and lending (SBL). The Korea Securities Finance Corporation (KSFC) was founded in 1955 on the basis of what is now known as the Capital Market Act. This organisation was created so that it could contribute to the stable development of the South Korean capital market “by supplying funds and securities”, says TJ Hong, who is in charge of the SBL operating business at KSFC.
“Now we are playing a distinct role in the SBL market not only as a intermediary institution but also as a big player—KSFC usually lends some hard names from margin finance to the market.”
Similarly, the Korean Securities Depository (KSD) was established when the South Korean securities market developed rapidly in the 1970s with a surge in the number of listed companies and in trading volumes. This created a need for “efficient and safe securities settlement transactions”, says Emily Kim, an assistant manager in the SBL team at KSD.
“To meet the market needs for a secure deposit system, Korea Securities Settlement Corporation was established in 1974 under the Securities and Exchange Act the [Capital Market Act].”
KSD is first and foremost a central securities depository (CSD). Kim says that it aims to be as competitive as leading international CSDs. It wants to “work with them as partners, based on international-level expertise and reliability accumulated through its role as the core infrastructure of domestic financial markets”.
“[A]s a CSD with global standard services, KSD envisions itself as a hub linking Asia and the world and a partner rivaling global financial market participants,” explains Kim. “In this respect, KSD is committed to provide competitive SLB intermediary services to our participants with global standards.”
As an SBL intermediary, KSD provides a range of services. It acts as an intermediary and broker in transactions, it executes them, delivers and returns securities, manages the rights arising from loaning securities and manages collateral relating to transactions.
KSD finds lenders and borrowers and matches them to transactions, says Kim, and it manages collateral by “conducting mark-to-market on daily basis”. She adds: “KSD manages rights arising from loaned securities, including right issues and payment of dividends, and bond interests as well.”
There has been opposition to CSDs having the ability to carry out commercial SBL activities. Industry bodies and market participants have argued that CSDs should not be able to carry out SBL activities because it would be anti-competitive, as CSDs have a market-wide view that could allow them to identify long/short positions to their advantage.
But Kim says that KSD is the first intermediary institution to introduce SBL intermediary services to South Korea, so, “in that sense, KSD’s history in SBL transactions is [South] Korea’s history in SBL”.
“KSD has an extensive network of lenders and borrowers so KSD can minimise the time and costs involved in searching for the securities fit for transactions. Also, by performing mark-to-market, margin call and periodically evaluating participants’ credit status, KSD maintains secure SBL transactions and reduces risks.”
Lenders and borrowers often use KSD’s services because it guarantees transaction settlement. Kim says: “Upon occurrence of the non-performance of obligation, KSD is responsible to perform to the lender on behalf of the borrower who failed to perform its obligation—except for customised transactions. KSD may dispose of the provided collateral and purchase from the market the securities equivalent to the type and volume of the SBL securities.”
“Then, KSD shall deliver or pay them to the lender. In the case where the collateral cannot be disposed of or where cash proceeds after the collateral disposal is insufficient, KSD shall take measures at its cost.”
Keeping transactions secure is of the utmost importance to KSD. Its regulations specify the types of collateral that can be used. As of July, KOSPI 200 stocks, Korea treasury bonds, monetary stablisation bonds, corporate bonds, exchange-traded funds, certificates of deposit and cash can be used as collateral in SBL transactions.
Kim says: “Participants have requested for a wider range of collateral and KSD is planning to expand the range of eligible collateral to meet the rising market demand.”
In a statement, the Bank of Korea added: “[We anticipate] that the domestic economy will sustain a negative output gap for a considerable time going forward, due mostly to the increase in euro area risks and the sluggish economies of its major trading partners.”
Many Asian countries have export-orientated economies that rely on the business of trading partners such as the US and countries in the EU. With those economies struggling, and growth in emerging markets continuing to slow, “mostly on sluggish exports”, the Bank of Korea decided to act to ensure stable economic growth.
Name of the game
Ensuring sound economic growth is something that is reflected in the country’s attitude to securities borrowing and lending (SBL). The Korea Securities Finance Corporation (KSFC) was founded in 1955 on the basis of what is now known as the Capital Market Act. This organisation was created so that it could contribute to the stable development of the South Korean capital market “by supplying funds and securities”, says TJ Hong, who is in charge of the SBL operating business at KSFC.
“Now we are playing a distinct role in the SBL market not only as a intermediary institution but also as a big player—KSFC usually lends some hard names from margin finance to the market.”
Similarly, the Korean Securities Depository (KSD) was established when the South Korean securities market developed rapidly in the 1970s with a surge in the number of listed companies and in trading volumes. This created a need for “efficient and safe securities settlement transactions”, says Emily Kim, an assistant manager in the SBL team at KSD.
“To meet the market needs for a secure deposit system, Korea Securities Settlement Corporation was established in 1974 under the Securities and Exchange Act the [Capital Market Act].”
KSD is first and foremost a central securities depository (CSD). Kim says that it aims to be as competitive as leading international CSDs. It wants to “work with them as partners, based on international-level expertise and reliability accumulated through its role as the core infrastructure of domestic financial markets”.
“[A]s a CSD with global standard services, KSD envisions itself as a hub linking Asia and the world and a partner rivaling global financial market participants,” explains Kim. “In this respect, KSD is committed to provide competitive SLB intermediary services to our participants with global standards.”
As an SBL intermediary, KSD provides a range of services. It acts as an intermediary and broker in transactions, it executes them, delivers and returns securities, manages the rights arising from loaning securities and manages collateral relating to transactions.
KSD finds lenders and borrowers and matches them to transactions, says Kim, and it manages collateral by “conducting mark-to-market on daily basis”. She adds: “KSD manages rights arising from loaned securities, including right issues and payment of dividends, and bond interests as well.”
There has been opposition to CSDs having the ability to carry out commercial SBL activities. Industry bodies and market participants have argued that CSDs should not be able to carry out SBL activities because it would be anti-competitive, as CSDs have a market-wide view that could allow them to identify long/short positions to their advantage.
But Kim says that KSD is the first intermediary institution to introduce SBL intermediary services to South Korea, so, “in that sense, KSD’s history in SBL transactions is [South] Korea’s history in SBL”.
“KSD has an extensive network of lenders and borrowers so KSD can minimise the time and costs involved in searching for the securities fit for transactions. Also, by performing mark-to-market, margin call and periodically evaluating participants’ credit status, KSD maintains secure SBL transactions and reduces risks.”
Lenders and borrowers often use KSD’s services because it guarantees transaction settlement. Kim says: “Upon occurrence of the non-performance of obligation, KSD is responsible to perform to the lender on behalf of the borrower who failed to perform its obligation—except for customised transactions. KSD may dispose of the provided collateral and purchase from the market the securities equivalent to the type and volume of the SBL securities.”
“Then, KSD shall deliver or pay them to the lender. In the case where the collateral cannot be disposed of or where cash proceeds after the collateral disposal is insufficient, KSD shall take measures at its cost.”
Keeping transactions secure is of the utmost importance to KSD. Its regulations specify the types of collateral that can be used. As of July, KOSPI 200 stocks, Korea treasury bonds, monetary stablisation bonds, corporate bonds, exchange-traded funds, certificates of deposit and cash can be used as collateral in SBL transactions.
Kim says: “Participants have requested for a wider range of collateral and KSD is planning to expand the range of eligible collateral to meet the rising market demand.”
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