Starting Next Month, Mandatory Holding of a Certain Percentage of Cash Equivalents When Selling RP

[Asia Economy Reporter Minji Lee] Starting from the 1st of next month, when raising funds through repurchase agreements (RP), a certain percentage of the sold balance must be held in cash-equivalent assets. On the 24th, the Financial Services Commission set detailed provisions such as the scope of cash-equivalent assets through amendments to the Financial Investment Business Regulations.

This is a follow-up measure to the 'Improvement Plan to Enhance the Efficiency and Stability of the RP Market' promoted by the Financial Services Commission. RP refers to transactions where securities are purchased (sold) and then sold (purchased) again at a predetermined price after a certain period.

The financial authorities defined the scope of cash-equivalent assets as assets that have no restrictions on disposal and can be liquidated on the same day. Financial products recognized as cash-equivalent assets include cash, negotiable certificates of deposit, deposits at securities finance companies, bank, securities firms, and deposit issuance notes. Foreign currency deposits and other foreign currency-denominated assets are also recognized as cash-equivalent assets.

In the case of MMT and MMW, which are discretionary investment assets, only the liquidity regulation ratio currently in effect is recognized because there may be some restrictions on cashing out during large withdrawal requests in market shock situations.

The mandatory holding ratio of cash-equivalent assets is set lower for longer RP transaction periods to encourage transactions with maturities of two days or more (term transactions). Additionally, to ease the regulatory compliance burden on market participants, implementation will be divided into three stages.

During July, only overnight transactions must hold cash-equivalent assets equivalent to 1% of the RP transaction volume. From August to April next year, during the third quarter, overnight transactions must hold 10%, and term transactions must hold 0-5% of cash-equivalent assets. From May onward, overnight transactions must hold 20%, and term transactions must hold 0-10%.

The RP transaction volume used as the basis for calculating the cash-equivalent asset holding ratio is set as the highest monthly average daily RP sold balance over the past three months. For collective investment schemes, considering their characteristic of allowing frequent redemptions, the same-day RP sold balance is used as the basis.

The financial authorities explained, “Starting next month, an improvement plan to set minimum margin rates reflecting the characteristics of collateral securities and the credit risk of sellers in RP transactions will also begin,” adding, “Guidelines related to the application of minimum margin rates will be prepared by the end of August and implemented from September.”

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