Seoul is quietly building a repurchase market, reported the Financial Times’s Seoul bureau chief September 12.
Korean financial institutions fund each other with short-term unsecured loans in a call market 51 percent of the time, the Financial Times reported. Only 16 percent of funding comes from repos.
A call market is where trades are not continuous, but rather take place only at specified times. The government worries that these short-term unsecured loans are risky.
“The regulators’ answer is a repo market, where this funding has to be backed up by collateral, usually of sovereign debt,” said the Times.
Korean officials apparently are optimistic about the repo potential, in spite of the repurchase catastrophe in the U.S. and Europe during the financial crisis of 2007-2008.
Work has begun on needed infrastructure. To get an effective repo market, “computers all have to learn to talk to each other to introduce a central clearing system for repurchase contracts, standardise those contracts and trade them online online,” said the Times.
A proper repo market will increase stability and make Korea’s sovereign bonds more liquid. That issue of liquidity is crucial as Asia’s fourth-biggest economy has been angling to get itself listed on Citigroup’s World Government Bond Index, which is tracked by key investors such as Japanese pension funds. …
The absence of a repo market is often cited as an embarrassing failing …
Having a functioning repurchase market “could make a big difference to Korea’s standing in international bond markets,” said the Times.
It could be up and running by the end of next year.