FSC Korea Revises Liquid Asset Requirements for Repo Market Borrowers

Source: Regulation Asia Editors, Regulation Asia 2020-06-28

The liquid asset holding requirements for repo sellers such as hedge funds will gradually increase in three stages from July until April 2021.

South Korea’s FSC (Financial Services Commission) has revised its regulations setting out the liquid asset requirements for the sellers of repurchase agreements.

The FSC has sought to improve the effectiveness and soundness of the rapidly growing repo market, which has featured a notable increase in leveraged investments by repo sellers (borrowers) – e.g hedge funds, publicly offered funds, etc.

In December 2019, the FSC introduced legislative revisions requiring repo sellers to hold liquid assets. The latest measures establish the specific scope of liquid assets as well as holding requirements.

Liquid assets include cash, savings accounts, certificates of deposit, liquid loan commitments, readily disposable deposits of securities companies, up to 30 percent of money market trust (MMT) and money market wrap (MMW), promissory notes, payment reserves of the BOK (Bank of Korea), and liquid assets in foreign currencies.

The liquid asset holding requirements for repo sellers (borrowers) will gradually increase in three stages from up to 1% of the transaction amount in July, to up to 10% between August 2020 and April 2021, and then to up to 20% percent thereafter – for overnight repo.

Liquid asset holding requirements, Source FSC Korea

The changes take effect from 1 July 2020, coinciding with improved rules on minimum margin requirements for repo buyers (lenders).

FSC Korea Revises Liquid Asset Requirements for Repo Market Borrowers

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