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Country Profile: South Korea's securities finance market

06 March 2017

South Korea is now the global number one emerging market in terms of revenues, loans and inventory

Read more: securities lending repo South Korea

A leading example of this is renewable energy equipment firm Celltrion, which was the top special in Asia and the fourth biggest globally, contributing almost 3% of revenue (Tesla, the biggest, contributed 8%). During 2016 the fees were between 15% and 20% but this has since reduced to 6%.

Other top revenue earning stocks included: Oci Co Ltd, Kakao Corp, Hotel Shilla, Hanmi Pharm and Samsung Heavy Industries.

South Korea represented 59% of emerging markets’ total revenue, with Taiwan at 20% and Malaysia at 6%. It also takes the number one spot in available inventory with 36% (versus 22% from South Africa and 16% from Taiwan) and loans with 40% (versus 24% from Taiwan and 19% from South Africa).

"Interestingly, from an emerging market perspective, South Korea is now the global number one emerging market in terms of revenues, loans and inventory, claiming the top spot by a very long margin from local markets such as Taiwan and Malaysia," says Measures. "Given the exposure of South Korea to China, and lack of international SBL opportunities in China domestically, this emerging market predominance is expected to continue until workable international models are implemented in India and China," adds Measures.

The SBL model at KSD continues to evolve, and good progress was made in 2016 in working through nuanced issues in the market. Standing proxies can now send in details of each month’s transactions, while duration limits in between have been loosened and ETF collateral valuation ratios have been improved to give borrowers more headroom. "KSD organised an international securities financing forum in Hong Kong in October, which was well received by the market and continues to show the partnership that exists to try and evolve in the process and system to fully meet its long-term potential," says Measures.

However, challenges remain for market participants. For example, "various corporate action events routinely require lenders to action immediate recalls of securities, in order to protect beneficial owner entitlements," says Fannin. "This is an unusual requirement that dampens broader market liquidity, particularly for those securities trading special. South Korea also requires borrowers to pre-borrow prior to any intended execution. This increases borrower transaction costs in cases where trades are ultimately not executed."

Chamil Ioussoupov, head of equity finance Hong Kong, Natixis, says: "Korea, in comparison to other markets, is already very restrictive and controlled in terms of reporting trades and registration. The framework is already in place. The main barrier in the market today is the foreign ownership limit, but that has existed for a long time."

The most recent development was a note released by Korea Exchange (KRX) in early February announcing its intention to change its rules regarding the designation of "overheated" short-sold stocks. Detail has not yet been provided but it will include strengthened penalties against the short selling rule violators and will take effect from 27 March 2017.

"Any new limitations or finger-pointing is of course important, especially if it brings the license into question or heftier fines," says Ioussoupov "But what is more important is the framework, rather than just one mechanism."

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