KSD, Korea Securities Finance sign 1 trillion won securities-backed loan agreement... easing foreign investors’ settlement burden

[Financial News] KSD and Korea Securities Finance have established a liquidity supply system worth up to 1 trillion won to prepare for settlement defaults by institutional stock settlement participants. The measure is intended to reduce the cash settlement burden on foreign financial institutions and improve their access to the Korean securities market.
KSD and Korea Securities Finance announced on the 28th that they had signed a securities-backed loan agreement worth up to 1 trillion won. Under the arrangement, Korea Securities Finance provides liquidity to KSD using the securities deposited by a participant as collateral if the participant fails to fulfill its payment obligation.
KSD serves as the clearing and settlement institution for transactions between securities firms, institutional investors and foreign investors. If a participant defaults on a settlement, it completes the transaction by using settlement completion resources. At KSD’s request, Korea Securities Finance provides up to 1 trillion won in liquidity, secured by the securities deposited by the participant.
The agreement is part of ongoing efforts to reduce the burden of settlement facilitation funds on foreign financial institutions. These funds are cash collateral deposited with KSD in institutional stock settlements to allow securities to be delivered before the settlement payment is made. They are mainly paid by foreign securities firms and custodian banks. The related cash burden has grown as stock market trading volumes have increased sharply this year.
In April, KSD implemented measures to ease foreign financial institutions’ liquidity burden, including moving up settlement operating hours from 9 a.m. to 7 a.m. and reducing settlement data units from 5 billion won to 1 billion won. As a result, the average daily settlement facilitation funds deposited by each foreign financial institution member fell 55.3%, from 269.92 billion won in the first quarter to 120.61 billion won in the second quarter. During the same period, trading value on the KOSPI Composite Index rose 45.6%, from 29.4 trillion won to 42.8 trillion won.
The two institutions will also introduce the securities payment system for settlement facilitation funds starting on the 29th. Settlement facilitation funds, which previously could be paid only in cash, may now be paid in securities such as stocks or bonds. However, securities collateral is not easy to convert into cash on the same day when a settlement default occurs. The 1 trillion won loan agreement will therefore serve as settlement completion resources to supplement the system.
The measure is a follow-up task from the joint interagency “MSCI Developed Markets Index inclusion task force” held in August. KSD and Korea Securities Finance plan to improve foreign investors’ access to the Korean securities market through expanded settlement completion resources and the securities payment system, while also pursuing additional structural reforms in the fourth quarter.
[email protected] Bae Han-geul Reporter