Did the 'Short Selling Ban' Take Effect?... Lending Balance Plummets by 50 Trillion Won

Securities Firms Breathe Easier with Fund Inflows
Decrease in Large Transactions Also Plays a Role
Financial Support Boosts Stability

[Asia Economy Reporter Park Jihwan] The stock lending balance, known as the standby funds for short selling, is showing a sharp decline. The lending balance, which reached a yearly high of 73 trillion won in March, has now decreased to the 50 trillion won range. With the financial authorities' six-month temporary ban on short selling and securities firms easing their cash flow, the urgent phase of securing liquidity through the lending market is considered to be over.

According to the Korea Financial Investment Association on the 7th, the lending balance on the 4th was 56.0371 trillion won, marking the lowest point of the year, but it slightly increased to 57.4518 trillion won the following day. However, compared to the yearly high of 73.4429 trillion won on March 5, it has decreased by 22% over two months.

The recent decline in the stock lending balance can be attributed to two main reasons. First, the financial authorities' complete ban on short selling in the stock market for six months until September is considered the primary factor behind the decrease in lending transaction balances. On March 13, the Financial Services Commission announced a six-month ban on short selling as a measure in response to the stock price plunge caused by the COVID-19 outbreak. This complete ban on short selling is the third in history, following the 2008 global financial crisis and the 2011 European debt crisis. The lending transaction balance refers to the volume of stocks borrowed and traded in the market. It is generally regarded as a leading indicator of short selling. Since short selling is banned, the lending balance naturally decreased.

The other reason can be found in margin trading, where stocks are pledged as collateral to raise funds. Since March, the increase in the stock lending balance is largely attributed to securities firms' initiatives. At that time, securities firms, which were facing severe difficulties in cash flow due to corporate paper (CP) repayments and margin calls on equity-linked securities (ELS), sought to secure short-term liquidity through the lending market.

In the previous month alone, maturing CPs amounted to a total of 800 billion won, including 200 billion won each from NH Investment & Securities, Mirae Asset Daewoo, and Shinhan Financial Investment, and 180 billion won from Meritz Securities. Additionally, the impact of ELS margin calls was significant as the global stock markets plunged due to the spread of COVID-19.

As the COVID-19 situation rapidly worsened in March, concerns arose in April about companies facing difficulties in raising funds. In response, securities firms secured liquidity through margin trading. While urgent cash was needed, the market conditions did not support traditional methods such as issuing electronic short-term bonds or CPs. However, with the financial authorities' support packages and the stabilization of the domestic stock market index decline, the feared liquidity crunch did not materialize.

A financial investment industry official explained, "The recent decrease in lending transactions is partly due to the short selling ban, but the reduction in margin trading, where stocks are pledged as collateral to raise funds, also plays a significant role. Securities firms that avoided the worst cash crunch in April no longer have incentives to secure cash-type stock collateral through margin trading."

This content was produced with the assistance of AI translation services.