State Street Bank and Trust Company (SSBT) headquarters in Boston / Captured from SSBT website
State Street Bank and Trust Company (SSBT), one of the world’s largest custodian banks, will suspend lending stocks traded in Korea, fueling speculation that the suspension can trigger a further exodus of foreign capital from Seoul following its ban on short selling.
According to industry sources, Nov. 10, SSBT said in a letter to major institutional investors worldwide last month that it will cease lending services for Korean stocks electronically beginning next year.
The planned suspension follows the Korea’s Financial Services Commission (FSC) Nov. 5 announcement that it would impose a ban on short selling through June 2024, in the name of preventing global investment banks from exploiting the trading strategy to make illicit gains.
Custodian banks are very different from retail and commercial banks, in that they do not provide standard banking services such as accounts, credit cards or loans.
Instead, they are responsible for providing securities services such as lending, either physically or electronically.
Short selling is a practice of selling borrowed securities, with a trader hoping to be able to make a profit by buying them back at a price lower than the selling price.
In that regard, those who make investments through short selling have been key customers of SSBT.
The period of Boston-headquartered SSBT’s suspension partly overlaps with the FSC’s ban.
Subsequently, SSBT’s measure is anticipated to add to concerns over outflow of foreign capital, considering the short selling market in Seoul has been dominated by foreign investors.
They have accounted for 67.9 percent of cumulative short selling in the Korean stock market so far this year, according to the Korea Exchange (KRX).
“More foreign investors are likely to turn away from the Korean stock market because, even after the FSC’s ban on short selling is lifted, they will have trouble borrowing Korean stocks as SSBT’s suspension on those shares will be still effective,” NH Investment & Securities analyst Kim Yoong-hwan said.
Speaking on condition of anonymity, a hedge fund manager echoed a similar view, noting short selling is favored by foreign hedge funds to cushion their investments against falling stock prices or to bet on shares.
Other market observers assessed that SSBT’s measure is also “widely perceived as Korea being a less significant market on international securities services."
A day after the FSC announced its ban on short selling, foreigners went on a buying spree of Korean stocks worth 711.1 billion won ($548.6 million) to return the shares borrowed from lenders.
But from a broader perspective, they net sold 3.11 trillion won over the past three months in the midst of Korea’s sluggish exports, a record U.S.-Korea interest gap and other unfavorable investment conditions.
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