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Early 2003, Korea financial market had big impact from SK global scandal and credit card crisis. These financial crises made main call loan institutions such as bank and investment trust (also asset management) enforce counterpart credit risk control and reduce credit line to some financial institutions.
MOFE and FSS asked KMB to find a method to stabilize the money market and provide way for financial institutions to borrow money. KMB and KSD jointly developed brokerage and securities depository system and opened "Secured Call Market" on October 2003.
New Insolvency Law will enforce from 1st April 2006. This insolvency law included secured call as "appropriate financial transaction". By signing (secured call) Master Agreement between borrower and lender, secured call will be settled following Master Agreement regardless of related laws.
New Insolvency Law will dramatically change the money market instruments as New Insolvency Law will solve the concern about potential legal issues for lender. And as more and more asset management companies plan to attend secured call market, it will be important for borrower to attend secured call market and get ready for change.
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The Secured Call is also named "Korean Style Repo" as Repo transaction appears to be a sale and purchase of securities, the substance of the transaction is basically a collateralized loan.
The difference between the Secured Call and Repo is that call money institution establishes pledges in the secured call transaction but in Repo transaction legal title to the securities is passed over to the buyer. But Korea legislation considers both methods as being the same in legal aspect.
As ITCs(investment trust) are major loan institution in Korea money market, it will be much safer for borrowing institutions to use pledge schemed secure call than legal title transferring Repo.
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The Secured Call trading mechanism is quite similar to Unsecured (or Credit) Call except call money institution has to provide collateral to call loan institution.
KMB notifies KSD trade details and if trade details from each of the trade parties are exactly matched, the KSD system will proceed with settlement process.
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Settlement service is provided by KSD and KSD settles cash and collateral on Delivery Versus Payment (DVP) basis. Cash payment is made through BOK-wire or 2 designated banks and KSD establishes pledges against the securities put up as collateral. However, in case that both of the trade parties agree, they can choose Free Of Payment (FOP) settlement whereby securities and cash are settled separately.
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Eligible collaterals are cash and all marketable securities that are defined in the Security Act.
Call loan institution can choose "Collateral Pool" to reduce the risk of market value decrease when selling collateral upon insolvency. And call money institution can only provide collateral based on "Collateral Pool" chosen by call loan institution. Call loan institution usually chose KTB, MSB and Government guarantee bond for "Collateral Pool".
| Collateral Pool |
Rating |
Collateral Recognition Rate |
| Equity |
Equity |
70% |
| KTB |
KTB |
100% |
| MSB |
MSB |
70% |
| Municipal |
Municipal |
95% |
| Special bond |
Government Guarantee |
100% |
| AAA |
95% |
| Bank Debenture |
AAA |
95% |
| AA |
90% |
| Corporate Bond |
AAA |
85% |
| AA |
80% |
| CP |
A1 |
80% |
| A2 |
75% |
After the collateral is provided, the call money institution can change the collateral anytime without notice at its discretion as long as the collateral is within the bound of the collateral pool.
To add or modify the collateral pool, call money institution has to obtain the approval from call loan institution
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