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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

At the moment it is not clear how it is going to work, or its scope. "Suspensions and limits exist in every market, on particular stocks or even more widely," says Ioussoupov. "If it aligns the market mechanism controlling liquidity to prevent abrupt moves, it’s absolutely fine. But if it’s supertight, very hard to manage or understand, then I’m more sceptical."

Another source, who asked not to be named, says: "The Chinese regulator tried it last year and it was basically a massive failure. It’s not exactly the same thing, but there is a parallel. You have to be very careful about the effects of any new implementation because you also will influence how the market liquidity will react."

Hedge funds

"The Korean hedge fund industry is expanding sharply," says Rakesh Patel, head of equities, Asia- Pacific, HSBC. "There are now around 250 hedge funds based in Korea, which has come up from nothing five years ago, mainly backed by domestic life and asset management companies. The AuM is not particularly large but the Korean government bodies are trying to promote a larger industry."

"Today, the reality is that the main driver of the market is the offshore community," says Natixis’ Ioussoupov. "Onshore hedge funds have not had a meaningful impact yet but it is a growing space."

"Korean onshore hedge funds are much more likely to take positions in single stocks, especially the smaller names, rather than sector or country exposure. Korean hedge funds will be very focused only on Korea whereas international demand will see Korea as a sector – the approach is completely different."

Collateral management

Korean collateral can be managed and allocated by either a transfer of title or by the Kun-jilkwon pledge solution. Both collateral solutions and the choice of which largely depend on our clients’ need including preferences, which need to be agreed between the collateral provider and receiver. "The use of Korean collateral has been a very popular discussion topic for the Asian trading community and we expect this to continue into 2017," says Natalie Wallder, head of collateral management & segregation, Asia Pacific, BNY Mellon.

"We are starting to see some domestic Korean counterparts emerging into the marketplace whose need is to source collateral for OTC derivative margining requirements. This trend will likely continue and has the potential to develop into demand for support related to other types of collateralised trading instruments, domestically in Korea."

 "Korean collateral continues to be an interesting proposition for any tri-party collateral agent whereby the market infrastructure continues to evolve, particularly in the collateral transaction space where the market is hopeful that certain changes will be adopted in 2017. Financing in Korea tends to be against US dollar lending and the Korean collateral financing market is expected to expand further over the course of 2017."

Ioussoupov predicts that 2017 will see a "huge" increase in liquidity. "The next layer is to develop the financing side of Korean assets, so you can see the development of tri-party on a more liquid basis. Tri-Party agents will have to focus on Korea to make it as smooth as they can."

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