Industry players had anticipated the move, if not its scale, as it stemmed from changes to regulations announced in advance by the Ministry of Finance and Economy. Most executives welcome the new rules, which move KoreaÆs industry closer to international norms.
First, in November, MoFE implemented legislation that allowed clients to redeem from money-market funds in one day. Before, institutions had to give a long notice period, and fund managers could sometimes impose further delays in a state of crisis. But many corporations and institutional investors continued to use the funds as parking spaces for their cash, as the yields are better than those in a bank deposit.
Another new regulation came into force last Monday, 26 June, that barred fund managers from providing same-day interest on MMFs. Now investors must wait for the following day to start receiving interest.
ôThis is the international standard,ö says Lee Keunmo, vice chairman at Mirae Asset. He explains that now, the first dayÆs interest must be paid not by the fund manager, but by the Korea Securities Finance Corporation, a utility owned by banks, securities companies and Korean stock exchanges, which specialises in lending money for stock purchases and managing customersÆ deposits.
The new rule stipulates that when a securities company receives money from a client who opened an MMF account, it deposits the money at the KSF, which in turn runs it through an overnight call at 4.25% and pays interest of 3.9% to the client for the first day.
Lee says this is about 30-40 basis points less than what the fund manager will pay, hence the sudden bolt to move cash back to bank deposits.
ôFor a three-day rollover, you only get two dayÆs worth of interest at the old rate,ö says Kim Dong-il, fixed income CIO at Franklin Templeton in Seoul. ôIf you invest for one month, the difference is minimal.ö He thinks the new arrangements will make cash management more efficient, with investors parking in longer-term deposits.
Jay Lee, CEO at Macquarie IMM Investment Management in Korea, says institutions also fled en masse in anticipation of an upcoming law being drafted by MoFE, the Capital Market Integration Law, which contains a proviso that MMFs must have at least two institutional investors.
Today the Korean funds landscape is littered with thousands of dormant funds, most of them cash or short-term bond products, that were tailored for individual clients. Jay Lee estimates that out of around W200 trillion of mutual fund assets, W80 trillion are in funds designed for single investors.
So, winners and losers? On the winning side, itÆs the funds industry, which has been able to take a loss of assets in its stride and benefits from regulations in line with international practices. Those firms that have already succeeded in equity, balanced and international products havenÆt suffered.
ôThis isnÆt a serious incident,ö says Shin Yong-il, CEO at Deutsche Investment Trust Management. ôThe whole industry has changed since the SK Global crisis. With the growth of new products like regular savings plans, the industry can absorb these redemptions.ö
The other winners are the banks, which have just received a windfall, primarily into money-market deposit accounts, although industry executives believe investors will return cash to MMFs as they grow comfortable to the new rules. MMFs still provide a better yield.
The losers are the second-tier domestic houses that have built businesses on managing cash and short-term bonds. The fees on MMF are truly abysmal, typically 4-7bps, so volume counts for everything. By the end of June, the MMF industry had peaked in terms of assets, accounting for W75 trillion, of which W45 trillion came from corporations and financial institutions. The mass redemptions have shrunk the MMF market to W58 trillion, or 77% of its original size, so there is plenty of pain to go around but among a narrow segment of the industry.
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