Korean SLB Market & KSD SLB Service
Jong-Hyung Lee
Securities Lending & Borrowing Team
Korea Securities Depository
E-Mail : [email protected]
SLB Transaction - Overview
Definition
The lending of securities by an institution to another for a certain fee
Legal Characteristics
Ownership of the loaned securities is transferred from the lender to
borrower
Lender is entitled to all economic benefits from the loan securities
excluding voting rights
Function
Settlement coverage
Means of arbitrage
Means to enhance capital market stability and efficiency
2
Transaction Flow - Settlement Coverage
Instruction
Foreigner Custodian mismatch or
time lag
Sell
Non Member Member
Non Stock Stock
Member Sell order Brokerage Brokerage
Stock Buy
Brokerage
Settle
Institutional settlement
Borrow stock Intermediary
Lender
KSD
Transaction Flow - DR Arbitrage
Assumption
Assumption
Cost Neutral
Investment maturity: 10 days
Currency exchange risk: Hedged
Current Stock Price: 103,000 Won ADR
ADR Price: 99,000 Won
Long
Borrow underlying stock
Lender Borrower DR conversion to stock
Short borrowed stock
Spot Market
Return borrowed stock
Transaction Flow - CB/BW Arbitrage
Assumption
Assumption
Cost Neutral
Investment maturity: 10 days
Current Stock Price: 103,000 Won CB
Conversion Price: 99,000 Won
Long
Borrow underlying stock
Lender Borrower CB conversion to stock
Short borrowed stock
Spot Market
Return borrowed stock
Transaction Flow - Futures Arbitrage
Assumption
Assumption
Cost Neutral
Investment maturity: 20 days
Current KOSPI 200 Index: 110 Futures
KOSPI 200 Futures Index: 108
Backwardation (Basis -2) Long
Borrow underlying stock
Lender Borrower Settlement by Index
Short borrowed stock
Spot Market
Return borrowed stock
SLB Market - Development
SLB market opened (Aug. 1996)
KSD is firstly authorized as SLB intermediary
KSFC (July 2000) and securities companies are allowed to act as
SLB intermediary. (Sep. 2000)
SBL by Foreign investors was allowed (July 1998)
Non-residents first began SLB transaction in Nov. 2001
Approval system changed into Prior reporting system from Jan.
2006
Borrowing limit without BOK Prior reporting increased to KRW 50
billion from KRW 10 billion from Jan. 2008
Securities borrowing by indirect investment vehicles and
banks was allowed (May 2006)
Foreign currency & Foreign securities added as eligible
SLB collateral from April. 2008
7
SLB Market - Growth
<SLB Balance(Stock)>
million shares
700
600
500
400
300
200
100
0
S- F- J- D- M- O- M- A- J- J- N- A- S- F- J- D- M- O- M- A- J- J- N- A- S- F- J- D-
96 97 97 97 98 98 99 99 00 00 00 01 01 02 02 02 03 03 04 04 05 05 05 06 06 07 07 07
Total KSD Securities Companies
8
SLB Market - Growth (Cont’d)
100
150
200
250
50
million shares
96/09 0
97/02
97/07
97/12
98/05
98/10
<SLB Transaction Volume(Stock)>
99/03
99/08
00/01
00/06
Total
00/11
01/04
KSD
01/09
02/02
02/07
Securities Companies
02/12
03/05
03/10
04/03
04/08
05/01
05/06
05/11
06/04
06/09
07/02
07/07
07/12
9
SLB Market – SLB & KOSPI
KOSPI
1000
1500
2000
2500
500
0
2005 1
2005 2
2005 3
2005 4
2005 5
2005 6
2005 7
2005 8
2005 9
2005 10
2005 11
2005 12
2005. 01 ~ 2007. 12
2006 1
2006 2
2006 3
2006 4
2006 5
2006 6
2006 7
2006 8
2006 9
2006 10
2006 11
2006 12
2007 1
2007 2
(Unit : 100 million KRW)
2007 3
2007 4
2007 5
2007 6
2007 7
2007 8
2007 9
2007 10
2007 11
2007 12
0
50,000
100,000
150,000
200,000
250,000
10
20
08
255,000
260,000
265,000
270,000
275,000
280,000
285,000
/02
60 290,000
/0 08
/022
60
/0 08
2/030
6
/0 08
/024
60
/0 08
2/050
6
/0 08
/02 9
60
(Unit : 100 million KRW)
/1 08
2/000
6
/1 08
/02 1
60
/1 08
/022
60
/1 08
2/030
6
/1 08
/026
60
/1 08
2/070
6
/1 08
/028
60
/1 08
/029
60
/2 08
2008. 06. 02 ~ 2008. 06. 30 2/000
6
/2 08
2/00 3
6
/2 08
2/040
6
/2 08
5
SLB Market - SLB & KOSPI (Cont’d)
2/00
6
/2 08
2/060
6
/2 08
/07
6
/3
0
KOSPI
1550
1600
1650
1700
1750
1800
1850
1900
11
SLB Market – SLB & Market volume
(Unit: 100 million KRW)
Ratio
Year SLB Volume Market Volume
(Value)
2005 170,831 12,326,358 1.4%
2006 348,818 12,759,944 2.7%
2007 760,964 18,622,701 4.1%
12
SLB Market - Regulations (Intermediaries)
Securities Companies, Korea Securities Finance Corporation
(KSFC) and KSD are allowed to act as SLB intermediaries
SLB Regulations for Securities Companies
Regulation on the Supervision of Securities Business
– Method of Brokerage: Direct & Indirect intermediation
– Collection of Collateral: Securities & cash
– Administration of Collateral: Directly or entrust to KSD, trust company, etc
– Delivery of Securities : DVP by KSD book-entry transfer
– Disclosure of Transaction Details: KSDA disclosure & FSC reporting
KSDA Standard Agreement on Loan Transactions for Securities
KSFC and KSD SLB operations are conducted according to
internal regulations
KSD Regulation on Intermediation of Securities Lending & Borrowing
Transactions
The SLB business of KSD and KSFC will be directly regulated by
FSS with the enactment of Capital Market Consolidated Act from Feb.
2009
13
SLB Market – Regulations (Participants)
Participants Regulations & SLB Scope
Participant Regulation Scope
Securities Securities & Exchange Act Lending / Borrowing
Companies
Banks MoFE Ordinance Lending
Borrowing for hedging, fail-
cover & arbitrage
Fund Indirect Asset Management Lending (within 50% of total
Act Enforcement Decree asset value)
Borrowing (within 20% of
total asset value)
Insurance Regulation on the Lending
Company Supervision of Insurance
Business
14
SLB Market - Regulations (Short Sale)
Stock Short Sale Restrictions
Only “covered” short sale is allowed
– Sale which delivery is possible by T+2
– Sale of borrowed securities
– Sale of securities which return is confirmed by settlement date
Up Tick Rule
Short sale allowed when the trade price is not lower than the
previously traded price
Up tick rule exemptions
– Index arbitrage transaction
– ETFs sale & arbitrage transaction
Bond Short Sale Restrictions
Only securities companies can sell short
15
KSD SLB Service - Timeline
KSD opened SLB market for the first time in Korea
eligible securities : KOSPI stocks only
Aug. 1996
fee rate : fixed fee rate in accordance with loan term
transaction type : settlement coverage transaction only
Nov. 1997 Eligible securities expanded to KOSDAQ stocks
Sep. 1998 Eligible securities expanded to listed bonds
Bid-offer and customized transactions introduced
Mar. 2000
Rollover service introduced
Loan term of settlement coverage transaction shortened
July 2001 (T+5 →T+2)
Mark-to-market applied to bond collateral
Nov. 2001 Intermediary fee is reduced (5%→2%)
Dec. 2002 0% of collateral level allowed for customized transactions
16
KSD SLB Service - Timeline (Cont’d)
Feb.2003 Arranged transaction introduced
July 2003 Partial return service introduced
Feb. 2004 Adjusted hair-cuts ratio for security collateral
Lowered collateral level for securities companies
Jun. 2005
102% →100% ( only in case of bond SBL transaction)
Provided SLB consulting service for Thai Securities
Jun. 2005
Market
SLB service revised
Rollover for settlement coverage transaction introduced
July 2006
Eligible securities expanded to ELW
Securities borrowings by funds and banks allowed
17
KSD SLB Service - Timeline (Cont’d)
SLB fee calculation method revised
Transaction based monthly calculation replaced with mark-to-
Jan.2008 market method
New bond SLB transaction type launched
T+1 settlement transaction added
Foreign currency collateral system launched
USD & Treasury bonds added as eligible collateral for SLB
April 2008 transaction
18
KSD SLB Service - Overview
Market Participants
Lenders : Foreign investors, Institutional investors including
investment-trust companies, banks, insurance companies,
mutual funds and pension funds
Borrowers : Foreign investors, Securities companies, etc.
Intermediary : KSD
Advantages of KSD’s SLB Service
Access to wide range of lenders and borrowers
Collateral management and corporate actions know-how
Guarantee of settlement by KSD ensures stable SLB
transactions (customized transactions excluded)
19
KSD SLB Service - Eligible Securities
Stocks
KRX listed stock
Bonds
Listed bonds (Government bonds, municipal bonds, special
bonds, corporate bonds etc)
Exchange Traded Funds (ETF)
Equity Linked Warrants (ELW)
20
KSD SLB Service -Transaction Type
Settlement-Coverage transaction
Used to cover market settlement fails.
Bid-Offer transaction
Anonymous transactions with KSD as counterparty.
Customized Transaction
The lender and borrower decides the conditions and transacts
via KSD.
The lender is the pledgee for the collateral.
Arranged Transaction
The lender and borrower decides the conditions and transacts
via KSD.
KSD is the pledgee for the collateral and guarantees settlement.
21
KSD SLB Service - Transaction Type (Cont’d)
Settlement
Division Bid-Offer Arranged Customized
Coverage
Objective Fail coverage Investment strategy
Period 3 business days 1 year
Fee rate Bid-offer(25% max) Bid-offer Decided between trade parties
Collateral Mutual
100~110% according to participants credit rate
rate agreement
Pledgee KSD Lender
- Both borrower and lender
Early - In case of recall, the borrower must return the
Only for borrower
Termination shares within 3 business days (4 business days for
recalls after 12:00p.m.)
― Application and consent 3 business day prior to the maturity date
Rollover ― In settlement coverage transactions, application and consent is possible
until the maturity date
Partial
Possible
Return
22
KSD SLB Service - Transaction Flow
1)Application
1)Application
Borrower 2)Collateral KSD Lender
3)Matching 3)Matching
Report Report
Borrower Lender
4)Credit (+) A/C Book A/C Book 4)Debit (-)
1) Application and Matching: Trades are matched when the conditions of the
lender and borrower are met
2) Collateral: The borrower provides the required collateral in cash or
securities to the pledgee
3) Matching Report: The lender and borrower are notified of the trade details
as soon as the trade is matched
4) Delivery: Once the collateral is pledged, the SLB securities are transferred
by book-entry from the lender’s account to the borrowers account
23
KSD SLB Service - Collateral Management
Collateral Requirement
Borrowed securities
Rights from borrowed securities (Rights issue, bonus shares,
dividends, etc)
Fees (SLB fee+ intermediary fee)
Collateral Ratio
The collateral ratio is 100~110% depending on the participants
credit status rated by KSD (excepting customized transactions)
Pledgee
Customized Transactions: Lender
Bid-offer, settlement coverage, arranged transactions: KSD
24
KSD SLB – Collateral Management (Cont’d)
Eligible Collateral and Evaluation Rate
KRX-listed stocks : 70% ~ 80% of previous day’s closing price
Bonds (BBB or higher) : 80% ~ 100% of market price
ETFs : 80% of previous day’s closing price
Cash : 100%(Rebate is paid to borrower)
Marking-to-market
Collateral is marked-to-market daily to account for the changes in
the price of the loan securities and collateral securities
Exchange of Collateral
When the collateral securities loses value or liquidity due to
bankruptcy, composition, liquidation of the issuer.
When submission of the securities is required due to maturity, stock
split & merger, etc.
25
KSD SLB Service - Termination
Return at Maturity
Borrower must return the same amount of the same securities at
the end of the SLB period
Cash return is possible in case of bond SLB transactions when it
is difficult to return the securities, but an additional charge (1% of
previous day’s market price) must be paid
Early return
Lenders or borrowers can terminate SLB transactions at any
time during the SLB period by recalling or returning the securities
Rollover
Rollover is possible with the consent of the lender
26
KSD SLB Service - Corporate Actions
Principle
The lender is entitled to all economic benefits from the loan
securities excluding voting rights. (Lenders cannot exercise
voting rights since ownership is transferred to the borrower, so
the securities must be recalled in order to exercise voting rights.)
Cash Dividends, Bond Interest, Payment for Fractional
Shares
The borrower pays the economics benefits of the loan securities
to KSD, who then relays it to the lender
Stock dividends, Bonus Shares
The borrower must deliver the shares to the lender within 3
business days of the listing date
27
KSD SLB Service - Default
Default Events
The borrower is unable to return the loan securities or deliver the
entitlements derived from the loaned securities
The borrower is unable to supplement insufficient collateral
Default Rules
Customized Transactions : The lender liquidates the collateral to
cover the loss
Bid-offer, Arranged of Settlement Coverage Transactions : KSD
liquidates the collateral to settle the transaction, and afterwards
claims indemnification from the borrower
28
KSD SLB Service - Fees
SLB Fee
Fee paid by the borrower to the lender via KSD
– Closing price of the previous day x quantity x fee rate x SLB period /
365
In case of settlement coverage transactions, a fee of KRW 30,000
is collected in case the SLB fee is KRW30,000 or less
Intermediary fee
Fee paid by the borrower and the lender to KSD, the intermediary
– SLB fee x 2%
– The intermediary fee is 2bp per annum in case the SLB fee rate is less
than 1%
If the SLB fee is KRW 30,000, the borrowers pays KRW 3,000 as
the intermediary fee
29
KSD SLB Service - Taxation
KSD withholds taxes on SLB income and delivers them to
the National Tax Service (NTS)
Non-residents are taxed according to rates set by tax treaties
between their country of residence and Korea.
Taxes are imposed on
Bond interest (interest income)
Stock dividends (dividend interest income)
– Manufactured dividend payments of SLB transaction between non-
residents are exempt from withholding tax.
Interest on cash collateral (interest income)
SBL fees (other income)
30
Statistics - Transaction Amount
(Million Shares)
<SLB Volume>
1,800 91%
1,600
1,400
90%
1,200
1,000
800 82%
600 57%
400 56%
200
0
2003 2004 2005 2006 2007
Local Foreign 31
Statistics - Transaction Amount (Cont’d)
<SLB Value>
KRW 1000 Billion
90%
80
70
60
50 89%
40
30 83%
64%
20 65%
10
0
2003 2004 2005 2006 2007
Local Foreign
32
Statistics - Transaction by SLB Type
Year 2007
<Local Investors>
23.7% 3.1%
27.1%
46.1%
Customized Arranged Bid-
Bid-Offer Fail Cover
33
Statistics - Transaction by SLB Type (Cont’d)
Year 2007
<Foreign Investors>
1.7%
3.9% 0.1%
94.3%
Customized Arranged Bid-
Bid-Offer Fail Cover
34
Statistics - Top 5 SLB Stocks
Year 2007 (Unit: Thousand Shares)
Foreigner Local
Rank
Stock Volume Stock Volume
Korea Exchange
84,805 (5.2%) 1 KT Corp. 11,847 (0.7%)
Bank
Hynix Hynix
82,562 (5.1%) 2 10,766 (0.7%)
Semiconductor Semiconductor
KIA Motor 63,413 (3.9%) 3 KEPCO 5,693 (0.4%)
Woori Financial Shinhan Financial
60,875 (3.7%) 4 4,469 (0.3%)
Group Group
Woori Financial
LG.Phillips LCD 52,772 (3.2%) 5 3,958 (0.2%)
Group
35
Statistics - Lending Ratio
Year 2007
Volume Value (100 Ratio
Division
(Shares) million won) (Value)
Pension Funds 144,013,458 48,750 6.4%
Asset
97,220,721 42,453 5.6%
Management
Securities
Local 75,054,457 9,746 1.3%
Company
Bank 1,561,979 905 0.1%
Other 5,079,000 1,628 0.2%
Sub-Total 322,929,615 103,482 13.6%
Foreign 1,370,169,383 657,482 86.4%
Total 1,693,098,998 760,964 100%
36
Statistics - Borrowing Ratio
Year 2007
Volume Value (100 Ratio
Division
(Shares) million won) (Value)
Pension Funds - - -
Asset
3,193,196 1,352 0.2%
Management
Securities
Local 134,724,865 65,129 8.6%
Company
Bank 3,288,059 3,947 0.5%
Other 1,780,350 260 0.0%
Sub-Total 142,986,470 70,688 9.3%
Foreign 1,550,112,528 690,276 90.7%
Total 1,693,098,998 760,964 100%
37
SLB market – Issues
Foreign Ownership Limit
Foreigners are not allowed to borrow securities that are subject to
ownership limits for foreigners from local investors.
FSS regulation on foreigners’ securities trading
Prior Reporting System
Foreigners who want to borrow securities exceeding KRW 50
billion from local lenders should declare the details to BOK before
actual borrowing
Institutional investors needed to actively participate in SLB
market
Borrowing by indirect investment vehicles is limited to 20% of total
asset value of each fund
Unclear regulatory treatment for SLB transactions by banks
38
SLB market – Issues (Cont’d)
SLB Market Segmentation
Korean SLB market is divided by several SLB intermediaries.
Rules or regulations can be different for each intermediary.
Recall request for shareholders’ meeting
Long-term borrows may be difficult
High concentration of end-of-year recalls by major lenders limits
stock availability
39
SLB Market - Future prospect
Improvement of SLB Environment for Foreign Investors
Limit for borrowing from residents is expected to increase
Prior-reporting is expected to be replaced by post-trade reporting
or abolished
F/X market is scheduled to further liberalize by 2009
Achievement of More Balanced Market
Not only foreigners but local institutional investors will proactively
respond to the growing Korean SLB market
Further growth of SLB market
Growth of hedge fund with the enactment of Capital Market
Consolidated Act (from Feb. 2009~)
Establishment of SLB system for individual investors
40
Thank you.
41
