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South Korea
a significant role within Asia, but has within recent decades stepped up to become a major global player.
Since opening up the market to foreign direct portfolio investment in January 1992, KRX’s main board KOSPI has enjoyed sizable participation from global investors, ranging between 30% and 40% of market activity over the past two decades. However, foreign investors have contributed significant net outflow since March 2020 and foreign ownership is at the lowest rate since the global financial crisis.
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The Korean securities lending market had more than $157bn (£124bn) of lendable equities at the end of 2022 according to S&P Global Market Intelligence, down significantly from last year’s total of $195bn.
In terms of value on loan, the 2022 total of just over $16bn was more encouraging. The value of equities on loan dropped by 30% in 2020 before recovering to reach $13.6bn in 2021 – albeit only a modest increase on the $13.4bn valuation of 2019.
Korean securities lending revenues for equities enjoyed a further modest revival in 2022 with total revenues of $326bn compared to $311mn last year. However, this figure is still well down from the $483mn recorded in 2018 and even the $436mn generated in 2019 as the market continues to recover slowly from reduced activity in securities lending and short selling markets.
A report published by ASIFMA in November 2022 (Korea Capital Markets 2022 and BeyondOpportunities and Challenges) noted that the Korea Exchange (KRX) is the 15th largest in the world in terms of market capitalisation.
As such, the Korean market does not only enjoy
ASIFMA says its members welcomed the partial lifting of the short sales ban, as well as measures to improve regulatory oversight of securities lending to win back the public’s trust. However, active fund managers who employ market-neutral long-short strategies continue to remain on the sidelines until a broader range of securities eligible for securities lending become available to support their trading strategies.
Further, uncertainty over what constitutes legitimate trading activity has led many global firms to suspend market-making businesses in Korea which have historically helped to provide liquidity to the market.
The industry welcomed the decision of Financial Services Commission to lift the proposed fine by the Financial Supervisory Service of KRW 48bn on nine local and foreign securities firms for allegedly ‘disturbing market order’.
But although the FSC decision represented a significant, positive step in the right direction, market participants remain confused about the basis for the initial issuance of the fine by FSS and the industry would appreciate more rigorously defined trading guidelines and specifications and seek to resolve future misunderstandings by appealing for more information upfront.
The industry has supported South Korea’s longstanding aspiration to become upgraded to developed market status by MSCI, which could attract an increase in foreign capital inflows of up to $36bn and promote the long term growth and sustainability of the Korean market. The 2022 MSCI report identified several hurdles that Korea still needs to clear in relation to the FX
South Korea equities 2022 (US$)
market, short sales, and information disclosure in English among other matters. ASIFMA members have highlighted four equities issues – information flow and regulatory guidelines; top broker leader board and investor protection; foreign exchange; and short sales.