2016. 3. 14 Stock lending and short selling Maximizing regulatory efficiencies Korea’s securities lending and borrowing (SLAB) market expanded at a 13% CAGR over 2011-2015—to contrast with range-bound domestic stock markets—with related transaction volume hitting KRW189t last year (equivalent to 8.6% of KRX trading value), which we attribute to investors diversifying strategies along with supply hikes. Kospi’s short selling ratio topped 5% last year, and short selling provides liquidity and enables implementation of numerous investment strategies. SLAB and short-selling: SLAB boosts investment returns, by allowing investors to: 1) avoid settlement failure and cover short positions; 2) open short positions for long/short trading and derivatives hedging purposes; and 3) finance to improve efficiency. Investors should check out the securities lending programs managed by California Public Employees’ Retirement System (CalPERS) and Blackrock, and despite widespread negatives surrounding short-selling, it is undoubtedly positive for stock markets by not only providing liquidity, but by also enhancing the price discovery process. We also note that most research shows that the banning of short-selling failed to ease market volatility. Regulations: Financial crises worldwide led to the strengthening of short-selling regulations, with most developed markets standardizing the reporting of net short positions, with EU standards especially strong by requiring investors to publically disclose positions in addition to reporting. Balancing market function and transparency: Regarding the public disclosure of net short positions, the US Securities and Exchange Commission (SEC) suggests a comprehensive review of economic benefits—promoting market convenience and cost-effectiveness—and negatives (eg, copycats) should precede the adoption of a short-selling regulations. We believe a flexible short disclosure system would be needed in Korea to balance socioeconomic convenience with market efficiency. Kospi short selling Source: KRX, Samsung Securities 0123456789012345678Jun 08Dec 09Jun 11Dec 12Jun 14Dec 15Short selling to total trading ratio (LHS)Short selling value (RHS)(KRWt)(%) Derivatives Issue 2016. 3. 14 2 SLAB market expanding Korea’s securities lending and borrowing (SLAB) market has maintained solid growth for several years—to contrast with range-bound domestic stock markets—with transaction volume of KRW189t in 2015, equivalent to 8.6% of KRX trading value. This report compares the nation’s SLAB and short-selling markets with those in major global markets. Domestic SLAB market Korea Securities Depositories (KSD) reports that the nation’s SLAB trade reached KRW189t in 2015—equivalent to 8.6% of the KRX’s KRW2,200t full-year volume—with a balance of KRW39t, showing growth of 1.9x from 2010’s KRW99t (or 5.2% of full-year volume). The KRW39t figure was approximately 2.7% of the KRX’s end-2015 market cap with an estimated utilization ratio of 4.1% of the SLAB’s free-float-based market cap—assumes an average free-float ratio of 65% that excludes stakes held by large shareholders and special affiliates. For reference, SLAB balance in 2010 represented 1.3% of the KRX’s market cap, which also assumes a utilization ratio of 2%. Steady SLAB transaction and balance expansions since 2010 have been driven by robust demand from domestic institutions—eg, hedge funds, publicly-placed long/short funds, and privately-placed ARS—in pursuing new revenue sources amid range-bound stock markets. Korea’s SLAB market Year SLAB value (KRWb) SLAB volume (Million shares) SLB (KRWb) 2010 99,328 1,849 15,904 2011 112,689 1,914 19,221 2012 126,868 2,340 26,778 2013 142,901 2,973 29,650 2014 150,731 3,742 33,913 2015 189,304 4,627 39,532 Note: Balance at each end-year Source: KSD, Samsung Securities Contents Derivatives Issue 2016. 3. 14 3 The Kospi’s SLAB balance has soared 222% from KRW14.6t in 2011 to KRW47.1t as that for the Kosdaq jumped 8.x from KRW1.3t to KRW11.2t, with the latter’s expansion attributable to spikes in lendable assets and borrowing demand. Kospi and Kosdaq SLBs Source: KSD, Samsung Securities The SLAB balance for the Kospi-100 has stagnated since peaking at KRW37t in 2012, which is when the balance accounted for 4.1% of that index’s total market cap (currently at 3.6%). Meanwhile, the Kosdaq 100’s SLAB balance is at a record high KRW8t, or 9.5% of that index’s market cap. Kospi 100: SLB and weight in market Kosdaq 100: SLB and weight in market cap Source: KRX, Quantiwise, Samsung Securities Source: KRX, Quantiwise, Samsung Securities 051015202530354045502010201120122013201420152016KospiKosdaq(KRWt)0.00.51.01.52.02.53.03.54.04.50510152025303540Jan 10 Feb 11 Mar 12 Apr 13 May 14 Jun 15SLB (LHS)SLB weight in market cap (RHS)(KRWt)(%)0246810120123456789Jan 10 Feb 11