[Short Selling Fact Check] Has the Foreigners' Repayment Period Really Not Changed?

Foreigners and Institutions Face Increased Costs When Rolling Over Repayment Periods
Individuals Have Extended Repayment Periods Without 'Recall' Obligations
75% of Foreigners Repay Securities Lending Transactions Within 6 Months

The Korea Exchange, Korea Securities Depository, Korea Securities Finance Corporation, and Korea Financial Investment Association, along with other securities-related organizations, are holding a forum on "Short Selling, Resolving the Tilted Playing Field" on the afternoon of the 4th at the Korea Financial Investment Association in Seoul.

At a forum organized to gather opinions on improving the short-selling system, the gap in views between securities-related institutions and individual investors remained unresolved. While securities-related institutions pointed out that "individual investors lack understanding of the short-selling system," a representative of individual investors argued that "punishments for illegal short-selling by foreigners and institutions are too weak."

On the afternoon of the 4th, four securities-related institutions?the Korea Exchange, Korea Securities Depository, Korea Securities Finance Corporation, and Korea Financial Investment Association?held a forum titled "Short Selling, Leveling the Playing Field" at the Korea Financial Investment Association in Seoul. Representatives from the Korea Exchange, Korea Securities Depository, Korea Securities Finance Corporation, and Korea Financial Investment Association attended as related institutions. Academic representatives included Professor Kang Hyung-gu from Hanyang University’s Department of Finance and Management, Professor Bin Ki-beom from Myongji University, and Senior Research Fellow Nam Gil-nam from the Korea Capital Market Institute. Industry representatives from Mirae Asset Securities and Samsung Securities also participated. Although Jeong Eui-jeong, the representative of the Korea Stock Investors Association, was scheduled to attend as an investor representative, he was absent due to personal reasons, and Kim Han-gi, Policy Director of the Citizens' Coalition for Consumer Sovereignty, attended instead.

The forum focused on key issues such as the limitation of the repayment period for foreigners' short-selling, unifying collateral ratios between individuals and foreigners/institutions, and the establishment of computerized systems to block naked short-selling, clarifying the facts surrounding these topics.

Foreigners and Institutions: Repayment Period Changed to 90 Days + α... Increased Costs and Administrative Burden

- Even if the repayment period for foreigners’ securities lending contracts is limited to 90 days, the same as individuals, rollover is possible, so there is no difference from the current system?

△ This is not true. Park Yong-dae, a researcher at Mirae Asset Securities, said, "If the repayment period is set to 90 days, rollover (extension of maturity) must be done frequently, which creates operational (cost) and administrative burdens."

- There is no need to strictly follow global standards. The Korean market can limit the repayment period of securities lending contracts for foreigners and institutions to 90 days without problems?

△ This is not true. Securities lending contracts are private agreements. The repayment period and conditions are determined by the stock lender and borrower. There is a global standard contract for international securities lending that allows unlimited lending but sets recall obligations as a rule. Professor Bin Ki-beom of Myongji University’s Department of Economics explained, "Securities lending contracts are like wholesale markets, while margin contracts are like retail markets. Even in agricultural and livestock markets, the price determination methods differ between wholesale and retail markets, so demanding that securities lending (foreigners and institutions) contracts be the same as margin (individual) contracts is unreasonable."

- Foreigners and institutions can continue to rollover, so they can wait until the stock price falls, which is advantageous compared to individuals?

△ This is not true. Yeo Sang-hyun, Deputy Director of Korea Securities Depository, said, "Looking at transactions over the past five years, 87.3% of foreign borrowers repaid their securities lending transactions within one year." According to data compiled by the Depository, 74.8% of foreign borrowers repaid within six months. For domestic borrowers, 90.3% repaid within one year, and 85.7% repaid within six months.

Individuals Have No 'Recall' Obligation... Raising Institutions' Collateral Ratio Would Cause Discrimination Against Overseas Investors

- Has the repayment period system improvement become advantageous for individuals?

△ This is somewhat true. Securities lending contracts usually have no repayment period limit according to the international securities lending standard contract, but the stock lender can recall the stock at any time upon request. In contrast, individuals cannot borrow stocks directly from lenders and instead enter into margin contracts through securities firms. In this case, there is no recall obligation. Previously, the government extended the margin repayment period from 60 days to 90 days and changed the system to allow extension of the repayment period.

- The current margin system does not allow individuals to extend the repayment period even if they want to?

△ This is not true. This is one of the major misunderstandings. According to data compiled by the Depository, more than 90% of all extension requests are granted. Deputy Director Yeo Sang-hyun said, "For stocks with extreme price volatility, extensions may be denied even if requested," adding, "If an individual requests an extension, the securities firm must procure stocks from the securities lending market, but if stocks cannot be lent, the extension cannot be granted." In such cases, institutions and foreigners also find it difficult to borrow stocks easily in the securities lending market.

- To regulate foreigners and institutions, should their collateral ratios be raised to the level of individuals for fairness?

△ This is not true. First, for foreigners who account for more than 60% of short-selling transactions, securities lending transactions are usually conducted offshore. For example, Goldman Sachs Korea may enter into contracts with stock lenders through the lending intermediary institution (KSD), but Goldman Sachs’ U.S. headquarters or JP Morgan’s Singapore branch may also enter into securities lending contracts. Because they manage collateral directly, it is difficult to apply domestic collateral ratio regulations to them.

Moreover, if only KSD’s collateral ratio is raised to match individual standards, only domestic institutions that mainly use KSD will face higher collateral ratios, causing discrimination against overseas institutional investors. In particular, institutions and foreigners effectively experience increased collateral ratios through collateral discount evaluations, which also impacts the bond lending market exceeding 100 trillion won.