"LG Energy Solution, Historic Largest Deposit Temporarily Shocks Short-Term Funding Market"

[Asia Economy Reporter Park So-yeon] SK Securities stated, "It is necessary to be cautious of the wave-like impact caused by LG Energy Solution in the short-term funds market." The subscription for LG Energy Solution will begin over two days starting from the 18th, and the historically largest scale of subscription deposits is expected to temporarily shock the short-term funds market.

On the 18th, SK Securities hinted in a report, "Based on past cases, even after the subscription period, inflows and outflows of funds affect short-term interest rates."

SK Securities said, "In the current situation where the base interest rate hike's aftermath and deteriorating bond market investor sentiment exist, increased volatility in the short-term funds market can act as a factor expanding market interest rate volatility."

Accordingly, they advised, "This week, attention should be paid to interest rate volatility in the bond market, including the short-term funds market."

As the scale of recent IPOs has grown, the influence of subscription deposits on the short-term funds market has increased.

Ahead of its IPO, LG Energy Solution recorded the highest institutional demand forecast ratio in IPO history at 2023 to 1. Public subscription is scheduled for the 18th and 19th.

SK Securities explained, "Since last year, as liquidity in the financial market has increased, there have been many cases where funds have concentrated on IPOs. During the general subscription of SK IET's IPO last year, subscription deposits of 80 trillion won were gathered, acting as a volatility factor in the short-term funds market."

They added, "The general subscription for LG Energy Solution's IPO is expected to gather subscription deposits exceeding 100 trillion won." In stock IPOs, a portion of the subscription application funds must be paid as a deposit. The paid deposit is held as 'subscription deposits' until the subscription deadline.

SK Securities said, "Looking at the large IPOs in 2021, subscription deposits of 50 to 80 trillion won were paid to securities firms at once. Most of the paid deposits came from short-term liquid funds such as CMA and MMF, causing a sharp decline in short-term funds."

During the 2021 IPO subscription period, outflows of short-term funds amounted to approximately 40 to 60 trillion won. The securities firms' subscription deposits are deposited with Korea Securities Finance Corporation, which manages the funds as MMDA or RP until the subscription ends. The IPO process showed significant daily or bi-daily movements in short-term funds market cash flows.

SK Securities explained, "Large-scale short-term funds fluctuations directly affect market interest rates. RP rates showed large swings of about 5 to 20 basis points within one or two days around the IPO subscription dates."