Liquidity Control
The Financial Services Commission (FSC) said on November 20 that it will further strengthen the control to scale down Korea’s short-term, overnight-based money markets by diversifying ways for borrowing and lending between financial firms.
To curb the liquidity problem, the financial regulator ironed out a plan in which local brokerage houses and asset management firms will be prevented from raising funds in the call money market from 2015.
The call money market is a borrowing or lending mechanism that financial firms use to raise short-term funds among themselves with a maximum maturity period of 90 days.
Most call money transactions in Korea are made to come due overnight while the call market has been greatly favored by local financial firms as a means to raise funds urgently, since it requires no collateral.
Under the revised plan, however, eligible players in the call market will be limited in principle to banks only, with some exceptions allowed for some brokerage houses that have treasury bond dealings, or those engaged in the central bank’s open-market operations.
Starting from the first half of 2014, most securities firms shall have to reduce the monthly call transaction amounts to the equivalent of below 15 percent of their equity capital, which is cut down further from the initial criteria of a below-25 percent threshold the FSC brought in June 2011.
The FSC estimated the number of call money market players will be reduced to 63 from the current 413, and that of call loans to 132 from 414.
The FSC plans to drive the brokerage firms and asset management companies to submit their plans to reduce call money transactions next month, with the related law to be amended by the end of 2014.
As of the end of September, the size of Korea’s call market has shrunk to 30.9 trillion won (US$29.2 billion), which accounts for 40.2 percent of the entire short-term capital market worth about 72 trillion won (US$68 billion). The call money market size was 34.5 trillion won (US$32 billion) in May 2011 and the weight of the entire short-term capital market was 50.6 percent.