Regional Focus

Country Profile: South Korea

South Korea is a presidential republic consisting of sixteen administrative divisions. The country is developed with a very high standard of living. It is Asia's fourth largest economy and the world's fifteenth (nominal) or twelfth (purchasing power parity) largest economy. The economy is export-driven, with production focusing on electronics, automobiles, ships, machinery, petrochemicals and robotics. South Korea is a member of the United Nations, WTO, OECD and G-20 major economies. It is also a founding member of APEC and the East Asia Summit.

Market overview

J.P. Morgan was the first agent lender to enter the Korean market in 2002. Initially, Korea was a difficult market in which to gain entry, with many non-standard requirements. For example, the Korean market did not allow lenders to settle partial recalls/returns. In addition, there were onshore fee requirements and there was some uncertainty about corporate action events. However, over the past few years the market has developed and become a somewhat easier lending environment, and from an international investor’s point of view, a more standard lending environment in which to operate.

All loans are transacted through the Korea Securities Depository (KSD), although trades are agreed bi-laterally between lender and borrower and can be collateralized offshore. The majority of corporate action events are now supported by the KSD, however tender offers are not, and therefore securities have to be recalled from a loan to enable a client to participate.

After the financial crisis, demand for Korean equities declined significantly, however, with a relaxation of short selling rules and increased interest by hedge funds, business has taken off again, with balances more than doubling in the last 12 months. Spreads are also significant, averaging over 100bps. The technology sector is the main focus of directional demand, most specifically semi-conductors such as Seoul Semiconductor, LG Innotek and Hynix Semiconductor. Borrowers’ preferred collateral is non-cash, with equities being the most popular.

Considerations

Today the Korean market is a relatively straight forward market in which to lend.

• Clients are required to sign the “Business Activity letter” in order to determine the tax rate applied by borrowers.
• The market is strictly a beneficial owner market with client assets held in segregated accounts only. Therefore loans cannot be made in bulk across multiple clients. J.P. Morgan already holds clients’ securities and effects loans from client segregated accounts.
• The loan maturity of the market is fixed for one year. However, at the end of the term the loans can be extended.
• The market is not  a mandatory buy-in market, however, fails are very rare and not an accepted practice. To mitigate the risk of fails, J.P. Morgan retains buffers and manages liquidity to enable client sales to settle on time.  
• Collateral is typically non-cash, either International government Bonds, with haircuts of 105%, or equities with haircuts of 110%.

If you would like to understand more about lending your securities in South Korea, please contact your securities lending relationship manager.