South Korea equity data supplied by IHS
- South Korea is the third largest market in Asia
South Korea also performed well in 2016 as revenues jumped by
45% to $242m
Average fees, already the highest in Asia, climbed a further
30% for the year to 4.3%
- Balance also climbed, jumping 8% on average for the year
- Celltrion earned a massive $84m for beneficial owners,
over $60m more than any other Korean stock
- Inventories were flat at $82bn
Last year was another stand-out year for South Korea in terms
of gross securities lending revenues produced, with 43%
year-on-year growth from $165m to $236m. It established South
Korea as the third largest market in Asia Pacific, just behind
Hong Kong at $238m (down 34% in 2016 from $358m) and the number
one market Japan at $294m (following its 50% increase from
$196m). It is the sixth largest market globally.
South Korea remains an attractive trading destination, which
has enjoyed increased demand over the last two years. "This has
largely been driven by various regulatory changes aimed at
facilitating increased market liquidity, as well as its
exposure to a slowing China. Regulatory changes in other
jurisdictions have also helped make South Korea a more
attractive destination," says Dane Fannin head of capital
markets, Asia Pacific, Northern Trust.
Under Korea’s system, the borrower and the lender
choose the type of transaction and enter application details
into the web-based Korean Securities Depository (KSD)
securities borrowing and lending (SBL) system. A trade is
matched when the application details of the lender and the
borrower are met on issues, quantity and fee rates among other
metrics. Securities are directly transferred by book-entry from
the lender’s account to the
borrower’s account. More than 4.9 billion shares
were traded this way in 2016, according to the KSD, up from
around 4.5 billion in 2015.
South Korea operates on a pseudo-CCP model in respect of the
requirement for SBL to be intermediated by the KSD, Korea
Securities Finance Corporation (KSFC) or an authorised local
Darren Measures, executive director, product manager for agent
lending, Asia Pacific, J.P.Morgan, says: "This hybrid model has
proven to be a popular reference point for success in the
market as developing markets in India, Philippines, Indonesia
and Vietnam look to emulate an SBL process that gives control
and transparency to the local exchange, while being open enough
to attract international borrowers, agents and lenders into the
South Korea continues to be dominated by specials, with wide
variability month-on-month. During 2016 trading values ranged
KRW12.9trn to KRW23.8trn (average KRW15.82trn) and in terms of
shares traded between 341 million shares to 579 million shares
(average 413 million).
"Korea was the bright star of the middle of last year. Fees
were going really high and there were lots of specials. The
outstanding notional values were not biggest, but they were
decent. It is still an interesting market with very attractive
average fees – but the demand seems to have reduced,"
says Ariel Winiger, head of secured financing Asia Pacific,
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
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
"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."
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."
"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
"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
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
"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
"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
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."