South Korea
24 May 2011
It’s one of the most active markets in the world, and a key region for
securities lending in Asia
Image: Shutterstock
For a country still technically at war, South Korea is doing pretty well. Following the occupation of the whole of Korea during the World War II, the peninsula became the focus of the new Cold War in the 1950s, with American and Australian troops fighting communists. Although there has been a ceasefire and an uneasy truce since 1953, hostilities have never formally ended and the border between North and South remains the most fortified in the world.
Perhaps the North Koreans should take a look over the border to see how a country can succeed. From a rural, peasant nation a couple of generations ago, South Korea is now one of the most technologically advanced nations in the world, with the highest standards of healthcare, education and lifestyle anywhere.
And this educated population is intensely interested in financial markets, perhaps more so than anywhere else on earth. The KOSPI index is one of the most successful indices for retail investors, as millions of Koreans make their own investment decisions, not only buying stocks and shares, but investing in futures and options, as well as other key financial instruments.
Korea’s biggest companies are known worldwide - the likes of Dae Woo, LG, Hyundai and Samsung are leaders in their fields - the electronics firms especially have grown from cheap versions of Japanese market leaders to innovators and players in their own right. The recognition factor of many of these players is attracting more and more international investors to enter the market.
There remain some restrictions - whether formal or not - on international ownership of some Korean companies. Rules relating to ownership of some media and utility companies have led some firms to steer clear. HSBC’s aborted takeover of a Korean bank some years ago was said to be the result of the Government’s reluctance to sell to a Western organisation.
However, foreign investors may participate in securities borrowing/lending transactions using the KSD, Korea Íø±¬³Ô¹Ï Finance Corp (KSFC), or a securities company as the intermediary.
Foreign investors can freely borrow up to KRW 30 billion worth of securities from local residents, increased from the previous limit of KRW 10 billion. For amounts between KRW 30 billion and KRW 50 billion, only a one-off report within three days of exceeding KRW 30 billion will be required to be reported to the BOK and subsequent changes will be required to be submitted on a monthly basis by the tenth of the following month. Pre-reporting will be required for proposed borrowing in excess of KRW 50 billion.
Foreign investors are allowed to use foreign securities (T-Bills, T-Notes, T-Bonds) and foreign currency (US dollars) as collateral when borrowing Korean securities. This became effective February 4, 2009.
There are no Korean won (KRW) amount limits if the stock lending and borrowing is between non-residents and also if the stock lender is a non-resident whereas the borrower is a resident.
Foreign investors are required to open dedicated stock lending and borrowing accounts at the KSD, KSFC or securities companies in the same name that is inscribed in the IRC and place cash collateral or securities collateral to support the transaction.
Both the lender and the borrower can request for return of securities at any time before the maturity date.
The possible loan period has been extended from six months to one year, in order to reduce the common rollover requests.
Lenders and borrowers are able to change the loan conditions upon mutual agreement without the need to terminate the existing transaction.
Eligible securities for stock lending and borrowing are:
Stocks: all stocks listed on the KRX KOSPI Market and KRX KOSDAQ Market of the KRX.
Bonds: all listed bonds listed on the KRX.
Exchange Traded Funds.
Short selling
Korea hasn’t suffered as much from the downturn as other modern economies, and it has not needed to seesaw between different rules.
No one should sell listed securities that the person/entity does not own. In addition no one may borrow listed securities and then sell them. However, a short sale is exceptionally possible if it complies with following process:
investor to notify the selling broker, who is a Korea Exchange member, of whether such sale is a short sale
the selling broker will check whether the sale is a short sale or not and whether the settlement of the short sale trade is possible (it remains to be clarified how the check will be conducted) the selling broker must not accept the short sale order or shall not place the order to the exchange if the broker recognises that the short sale is unlikely to be settled the selling broker must notify the exchange of the fact that the sale is short sale.
Effective February 4, 2009 when placing sales trade order based on borrowed shares with a local broker, investors (including both foreign and domestic investors) are required to provide evidence of settlement capability of the sales trade to their local broker.
Effective from March 16, 2009 clients are required to notify brokers when they engage in a short sale with a borrowed position. However, please note that the covered short selling of trades with a borrowed position has been prohibited since October 1, 2008 and continues to be so.
Effective from June 1, 2009 covered short selling is permitted on all listed stocks with the exception of financial stocks, for which the ban remains in place. From this date all borrowers are required to provide intermediaries such as the KSD, KSF or local brokers with the original time and date and of when they have contracted to borrow the shares from a counterparty lender.
The KSD has provided further clarification regarding the requirement that effective June 1, 2009 borrowers are required to provide intermediaries such as the KSD, KSF or local brokers with the original time and date and of when they have contracted to.
Perhaps the North Koreans should take a look over the border to see how a country can succeed. From a rural, peasant nation a couple of generations ago, South Korea is now one of the most technologically advanced nations in the world, with the highest standards of healthcare, education and lifestyle anywhere.
And this educated population is intensely interested in financial markets, perhaps more so than anywhere else on earth. The KOSPI index is one of the most successful indices for retail investors, as millions of Koreans make their own investment decisions, not only buying stocks and shares, but investing in futures and options, as well as other key financial instruments.
Korea’s biggest companies are known worldwide - the likes of Dae Woo, LG, Hyundai and Samsung are leaders in their fields - the electronics firms especially have grown from cheap versions of Japanese market leaders to innovators and players in their own right. The recognition factor of many of these players is attracting more and more international investors to enter the market.
There remain some restrictions - whether formal or not - on international ownership of some Korean companies. Rules relating to ownership of some media and utility companies have led some firms to steer clear. HSBC’s aborted takeover of a Korean bank some years ago was said to be the result of the Government’s reluctance to sell to a Western organisation.
However, foreign investors may participate in securities borrowing/lending transactions using the KSD, Korea Íø±¬³Ô¹Ï Finance Corp (KSFC), or a securities company as the intermediary.
Foreign investors can freely borrow up to KRW 30 billion worth of securities from local residents, increased from the previous limit of KRW 10 billion. For amounts between KRW 30 billion and KRW 50 billion, only a one-off report within three days of exceeding KRW 30 billion will be required to be reported to the BOK and subsequent changes will be required to be submitted on a monthly basis by the tenth of the following month. Pre-reporting will be required for proposed borrowing in excess of KRW 50 billion.
Foreign investors are allowed to use foreign securities (T-Bills, T-Notes, T-Bonds) and foreign currency (US dollars) as collateral when borrowing Korean securities. This became effective February 4, 2009.
There are no Korean won (KRW) amount limits if the stock lending and borrowing is between non-residents and also if the stock lender is a non-resident whereas the borrower is a resident.
Foreign investors are required to open dedicated stock lending and borrowing accounts at the KSD, KSFC or securities companies in the same name that is inscribed in the IRC and place cash collateral or securities collateral to support the transaction.
Both the lender and the borrower can request for return of securities at any time before the maturity date.
The possible loan period has been extended from six months to one year, in order to reduce the common rollover requests.
Lenders and borrowers are able to change the loan conditions upon mutual agreement without the need to terminate the existing transaction.
Eligible securities for stock lending and borrowing are:
Stocks: all stocks listed on the KRX KOSPI Market and KRX KOSDAQ Market of the KRX.
Bonds: all listed bonds listed on the KRX.
Exchange Traded Funds.
Short selling
Korea hasn’t suffered as much from the downturn as other modern economies, and it has not needed to seesaw between different rules.
No one should sell listed securities that the person/entity does not own. In addition no one may borrow listed securities and then sell them. However, a short sale is exceptionally possible if it complies with following process:
investor to notify the selling broker, who is a Korea Exchange member, of whether such sale is a short sale
the selling broker will check whether the sale is a short sale or not and whether the settlement of the short sale trade is possible (it remains to be clarified how the check will be conducted) the selling broker must not accept the short sale order or shall not place the order to the exchange if the broker recognises that the short sale is unlikely to be settled the selling broker must notify the exchange of the fact that the sale is short sale.
Effective February 4, 2009 when placing sales trade order based on borrowed shares with a local broker, investors (including both foreign and domestic investors) are required to provide evidence of settlement capability of the sales trade to their local broker.
Effective from March 16, 2009 clients are required to notify brokers when they engage in a short sale with a borrowed position. However, please note that the covered short selling of trades with a borrowed position has been prohibited since October 1, 2008 and continues to be so.
Effective from June 1, 2009 covered short selling is permitted on all listed stocks with the exception of financial stocks, for which the ban remains in place. From this date all borrowers are required to provide intermediaries such as the KSD, KSF or local brokers with the original time and date and of when they have contracted to borrow the shares from a counterparty lender.
The KSD has provided further clarification regarding the requirement that effective June 1, 2009 borrowers are required to provide intermediaries such as the KSD, KSF or local brokers with the original time and date and of when they have contracted to.
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