Korean institutional investors have become more active participants in securities-lending programmes, but supply remains limited, prompting industry executives to hope the introduction of onshore hedge funds will boost activity.
Speaking at AsianInvestor’s fifth annual Korea investment summit in Seoul held earlier this month, Lee Sang-bum, head of foreign custody at Kookmin Bank, says the market’s traded value of lent securities continues to rise.
He notes that in 2004, the market saw W10 trillion ($9.4 billion) of total traded value, while 2010 recorded W110 trillion ($104 billion). Foreign securities comprise around 80% of that volume, however.
Lee adds that domestic institutions have traditionally been minor players, even onshore: in 2008, they provided only 9% of total supply. But in 2010, they rose to supply 21% of the market, as they continue to diversify their investment-management strategies and seek extra returns.
Returns to lenders have also increased in line with the market’s expansion. Lee says in 2008, local lenders received an aggregate return of $180 million, while foreign lenders active in the Korean market enjoyed $400 million in returns. In 2010, those figures both rose, to $240 million for local lenders (a 33% increase) and $540 million for foreigners (a 35% increase).
This is in keeping with global trends, says Richard Meek, Hong Kong-based head of securities-lending relationships for Asia at Brown Brothers & Harriman. He notes that, globally, lendable asset supply has returned to 2008 levels, at around $14 trillion, with average daily on-loan balances of $2 trillion.
“The industry has gone back to lending, and it’s here to stay,” he says, “but it’s being done through more customised programmes that recognise this is an investment-management function, not a back-office one.”
But while Korea faces a supply shortage, the rest of the world faces less demand, which Meek says is still down 50% from its 2008 peak. That is because of regulatory changes such as the Volcker Rule within the US's Dodd-Frank legislation, which is prompting investment banks to rethink their links to prop desks and hedge-fund strategies.
Although the Korea story is one of progress, other measures show how far the market has yet to go. One is utilisation – that is, what portion of lendable securities are actually lent. In Korea in 2010, utilisation was only 6.7%, versus 22% in Taiwan (and 8.4% in the US, although given the huge size of the US securities markets, it’s not quite an apples-to-apples comparison).
The average fee in Korea for borrowing securities in 2010 was 110 basis points, versus only 69bps in the US – although Korea is a far more efficient market than Taiwan, where fees averaged 260bps.
“Borrowing costs for shorting strategies are high because demand outstrips supply,” says Kirtes Bharti, executive director at Credit Suisse and chairman of the Pan Asian Securities Lending Association (Pasla).
Regulation is one factor, such as the requirement that some corporate bonds require case-by-case approval to borrow. “There is growth and revenue potential, but Korea needs to follow global regulatory best practices,” he adds.
Lee notes that the government is introducing legislation to attract onshore hedge funds this year. “That will bring in long/short and arbitrage strategies, and this will have a positive effect on demand for borrowing,” he says.