Korea's securities depository will take government bonds at up to 98% of value in place of settlement cash

Ninety-eight percent is the ceiling, and only government bonds reach it ^[1]. "We plan to apply collateral recognition ratios to government bonds, monetary stabilization bonds and similar instruments based on a combination of factors including remaining maturity, type and credit rating," a KSD official said ^[3]. A firm with 10 billion won of government bonds can post up to 9.8 billion won of collateral ^[2]. Turned around, the top-grade haircut is 2% ^[1], so a 10 billion won deposit needs about 10.2 billion won of bonds ^[2]. Paper graded lower on maturity, type or rating will need more.

Stocks are harder to price. Large-cap KOSPI shares qualify at a ratio from a value-at-risk model run under stressed conditions and reset every day ^[4], and the depository will revalue collateral in real time and make margin calls on every settlement date ^[5]. The KSD did not say what ratio that model will produce. A foreign equity fund holding no Korean bonds, the investor the all-cash rule hurt most ^[7], will learn the size of its saving only once the system is running.

The KSD's estimate of a cut above 50% in institutions' cash burden covers this system and next month's rule together ^[10]. For a foreign fund the second rule may matter more, or at least it matters whatever the fund owns. Shares due to arrive through on-exchange settlement will count as collateral themselves, so a broker can take delivery first without posting anything separate in advance ^[9].

I think the relief reaches holders of government bonds first, and that the foreign case rests on next month's rule more than on the 98%. That view is wrong if the stressed equity ratios come in high enough for large-cap holdings to cover most of a deposit, because equity-only funds would then get the full benefit this month. It becomes beside the point if the intraday net debit cap stays at 200 billion won per member firm ^[11]. That credit line would then be the limit for the quant funds, high-frequency traders and index-arbitrage desks that securities industry officials expect to draw in ^[12].

"Trading friction costs will fall sharply, and this could become a catalyst for lifting market liquidity and turnover," a brokerage official said ^[14]. Both that claim and the KSD's estimate can be checked once equity ratios are live. If the measured cash burden falls well short of half, the saving went mostly to bond holders.