South Korea’s Financial Investment Association (Kofia) has given permission to private banking investors to use equity- (ELSs) and derivatives-linked securities (DLSs) as collateral for cash loans.
“In the past, in order to maintain market stability, we did not allow the use of ELSs and DLSs, unlisted stocks or mutual funds as collateral for loans, as they were viewed as being difficult to calculate the fair value, or they had limited liquidity,” said Hyung Kyo Kim, manager of market regulation department at Kofia.
“While ELSs and DLSs are being used widely by both individual investors and corporates as investment instruments, it was very difficult to make use of these instrument other than simply waiting for them to mature or selling them before maturity, therefore we have relaxed the rules,” said Kim.
There will not be any restriction on underlyings or payoffs for ELSs and DLSs that can be used as collateral, said Kim. “Both individuals and corporates holding ELSs and DLSs will be able to use them as collaterals when sourcing funds from the securities firms,” he said.
“In the case of ELSs and DLSs exposed to market risk and are revalued downwards, it is up to securities firms to ask for alternative collateral; these kinds of potential risks will be considered during the valuation system prior to approval of the loans.”
The use of ELSs and DLSs as collateral is a follow-up to the stockmarket vitalisation plan announced by the Financial Services Commission (FSC) in November 2014. “As this can be an additional income source for securities firms’ loans, market players requested an opening of collateral options,” said Kim. “We expect to see improvements within securities firms’ profit model as well as diversified use of ELSs and DLSs, which will further revitalise the market.”
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