The Korea Exchange and the Korea Securities Depository are exploring the possibility of central clearinghouse (CCP) operations for the over-the-counter repurchase agreement (RP) market, which has an annual trading volume of 4.69 quadrillion won. Both institutions are examining the feasibility of directly conducting these operations through research projects, raising questions about future competition over operational control.
According to the financial investment industry on November 5, the Korea Exchange recently commissioned a study on the introduction of clearing for over-the-counter securities, including RPs. This study focuses on expanding the Exchange's existing CCP operations into the over-the-counter bond and RP markets. It includes an analysis of the feasibility of the Exchange conducting central clearing directly, as well as examining clearing and settlement system construction and risk management strategies.
A representative from the Exchange stated, "The CCP operations for over-the-counter securities require approval from the Financial Services Commission, and the current operator and future implementation timeline have not yet been determined." However, they emphasized that the study aims to assess the feasibility of introducing these operations and to review international examples.
Earlier, the Korea Securities Depository also commissioned a study in March to establish measures to enhance competitiveness in over-the-counter bond trading, with a budget of 200 million won. This means both institutions have initiated similar studies approximately seven months apart. The request for proposals from the Depository includes a comparison and analysis of the settlement processes if the CCP operations are conducted by the Depository versus another institution. The Depository has also set direct CCP management as a research focus, including areas such as clearing member management, margin systems, compensation fund sizes, and responses to settlement failures.
However, when asked about their intention to operate directly, the Depository did not provide a clear stance. A representative stated, "This is to proactively examine the potential for expanding central clearing in the domestic market and to seek strategies for enhancing market competitiveness," adding that the decision on who will conduct CCP operations will not be determined solely based on the study's results. They clarified that the study was commissioned independently based on their operational needs and research requirements.
A CCP acts as an intermediary in transactions between financial institutions, guaranteeing settlement and offsetting debts and credits. Currently, in the over-the-counter RP market, financial institutions trade directly while the Depository supports settlement and collateral management. The introduction of a CCP could reduce counterparty settlement risk and lower settlement burdens through multilateral netting. For the operating institution, it could also secure a new revenue source through clearing fees. The market is expanding; according to the Exchange, the annual trading volume of domestic over-the-counter RPs increased by approximately 112% from 2,210 trillion won in 2020 to 4,690 trillion won last year.
Both institutions have a history of competing for CCP rights. In 2011, they vied for the operation of the CCP for over-the-counter derivatives, and at that time, financial authorities favored the Exchange due to cost efficiency from utilizing existing clearing infrastructure. The Exchange received approval for over-the-counter derivatives clearing operations in 2013.
The backdrop for both institutions exploring new business possibilities is attributed to the transition of their existing core business areas into competitive frameworks. The Exchange's monopoly on stock trading was disrupted with the launch of NextTrade last year, and the Depository is also facing changes as new entrants are allowed in the specialized electronic registration of unlisted stocks.
While neither institution has fully engaged in direct competition yet, there are concerns that competition over operational control could intensify if discussions on regulatory implementation by financial authorities become more concrete. A source in the financial investment industry noted, "Both institutions have a growing need to secure new revenue sources as competition has been introduced into their existing business areas, and competition is expected to become fierce once the selection of the operating entity is clarified."
* This article has been translated by AI.
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