South Korea to push for naked short selling of bonds

November 20, 2009

By Cheon Jong-woo and Seo Eun-kyung
SEOUL, Nov 20 (Reuters) – A top South Korean regulator said on Friday the authorities would take steps to encourage local and foreign banks to use naked short selling of bonds, a move analysts said could trigger a flood of foreign buying.

Kim Jong-chang, governor of the Financial Supervisory Service (FSS), said in a revised statement that the regulator would discuss guidelines on naked short selling of bonds, when an investor sells a bond that has not yet been borrowed.

The move comes as South Korea has been seeking inclusion in Citigroup’s World Government Bond Index (WGBI) in an effort to attract more foreign investors to the domestic bond market, for which it offered tax advantages and allowed application of the international settlements system.

“We plan to hold discussions with related agencies to draw up guidelines on short-selling for bonds,” Kim said in a speech to a forum on the local bond market.

FSS spokeswoman Kim Soomi said the governor was referring to naked short selling.

Bond prices turned higher on foreign buying, with front-end treasury bond futures <KTBc1> up 4 ticks by 0540 GMT.

In an initial version of the statement, released to reporters prior to the speech, Kim said the authorities would allow naked short selling.

Kim gave no timing for when the guidelines might be agreed.

Rules for naked short selling were introduced in July last year, but there were no clear guidelines and the authorities have effectively blocked any transactions. The government does allow covered short-selling.

The outstanding value of South Korea’s bond issues stood at 1,200 trillion won ($1,029 billion) by the end of October, ranked the world’s 10th largest, with foreign investors accounting for 5.5 percent, according to the regulatory agency.

Transaction volume is expected to reach 2,500 trillion won this year, more than 20 times the amount in 1997.

Governor Kim said that if foreign investors, active in short-end debt and futures market, had more trading tools, the domestic bond market would see major progress.

He also said that the nation would improve the trading system, which usually relies on closed messenger services or calls, so foreign investors could participate more easily.

“It seems the authorities are trying to open the door far wider to foreign investors and this could be related to the government’s efforts to join the Citigroup global bond index,” said Yang Jin-mo, a fixed-income analyst at SK Securities.

“If put into action, the move will likely lure in sizeable foreign funds while increasing market volatility,” said Kong Dong-rak, a fixed-income analyst at Taurus Investment & Securities.

Analysts said officials needed more discussions because of the potential impact of the move on the won and following newly announced measures to tighten foreign exchange liquidity controls to reduce the risk of capital flight.

“Foreign investors could flood into the country, which will boost the won further. But at the same time the won would plunge again if they fly out, like last year,” said Park Tae-keun, a fixed-income analyst at Hanwha Securities.

“The authorities will have to find ways to reduce volatility,” he added.
(Reporting by Cheon Jong-woo and Seo Eun-kyung; Editing by Jonathan Thatcher and Jonathan Hopfner) ((;+822 3704 5648; Reuters ((If you have a query or comment on this story, send an email to ($1=1165.6 Won)

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