Securities firms acting as liquidity providers for Samsung Electronics and SK Hynix single-stock leveraged exchange-traded funds are disrupting South Korea's corporate bond market as extreme stock price volatility forces them to post additional margin requirements. The securities firms must supply substantial additional margin when the stock futures they hold decline in value, creating settlement risk from losses. To raise these funds, securities firms have turned to the corporate bond market, with Kiwoom Securities planning a 400 billion won bond issuance on the 21st, Samsung Securities issuing 600 billion won on the 10th, and Mirae Asset Securities issuing 1.26 trillion won in commercial paper last month. The surge in securities firm bond issuance is crowding out general corporate borrowers in an already tight corporate bond market experiencing rising interest rates.
Securities Firms Issue Hundreds of Billions in Bonds to Meet Margin Requirements
Kiwoom Securities, one of the securities firms serving as a liquidity provider for the leveraged ETFs, plans to issue 400 billion won in corporate bonds on the 21st, according to investment banking industry sources on the 15th. Samsung Securities, another LP securities firm, issued 600 billion won in corporate bonds on the 10th. Mirae Asset Securities issued 1.26 trillion won in commercial paper last month. The leveraged ETFs for Samsung Electronics and SK Hynix launched on May 27.
Leveraged ETF Structure Places Margin Burden on Liquidity Providers
Liquidity providers purchase Samsung Electronics and SK Hynix stock futures in advance for the leveraged ETF market. Futures are products that settle daily profit and loss in cash, so when stock prices fluctuate significantly as they have recently, the settlement amounts also grow larger. Liquidity providers must continuously add to the margin they deposit with the exchange. This month, the margin rates for Samsung Electronics and SK Hynix futures rose 24.7% and 32.3% respectively, further increasing the cash burden on securities firms serving as liquidity providers. The securities firms bear the actual burden of the 2x return structure.
Short-Term Funding Market Repo Rates Spike to 15%
Securities firms initially turned to the short-term funding market to raise margin funds in the early phase of the leveraged ETF launch, causing severe disruption in short-term funding market rates. An official from a domestic asset management company stated that "short-term funding market disruption was extreme last month and is now somewhat calmer," adding that "at that time, as the short-term funding market dried up, the 1-day repo rate on government bond collateral soared to 15%." Repo rates apply when borrowing or lending funds short-term with government bonds or high-quality bonds as collateral. This represents an abnormal spike considering repo rates typically move at levels similar to the base rate.
Securities Firm Bond Issuance Crowds Out Corporate Borrowers
Securities firms shifted direction toward issuing longer-maturity corporate bonds after finding it difficult to raise funds solely through short-term instruments. The outstanding balance of commercial paper and electronic short-term bonds reached 348.2342 trillion won as of the 15th, a 16.4% increase from 299.1718 trillion won in the same period last year. Securities firms' CP and short-term bond issuance balance accounted for 96.3447 trillion won, or 27.7% of the total. The increased volume of securities bond issuance is absorbing funds that general corporations need to raise, directly translating into refinancing burdens for companies.
FAQ
Why are securities firms issuing large amounts of corporate bonds?
Securities firms serving as liquidity providers for Samsung Electronics and SK Hynix leveraged ETFs must post additional margin when stock futures prices decline. To meet these margin requirements, Kiwoom Securities is planning a 400 billion won bond issuance on the 21st, Samsung Securities issued 600 billion won on the 10th, and Mirae Asset Securities issued 1.26 trillion won in commercial paper last month.
How did the leveraged ETFs affect the short-term funding market?
Last month, the short-term funding market experienced extreme disruption as securities firms sought to raise margin funds. The 1-day repo rate on government bond collateral spiked to 15%, an abnormal increase compared to typical levels near the base rate. Securities firms subsequently shifted to issuing longer-maturity corporate bonds after the short-term market dried up.
