Securities firms trade on customer money with high interest rates [Editorial/Woo Kyung-im]

Securities firms in South Korea are profiting handsomely by charging annual interest rates of around 10% on loans secured by investors' proceeds from stock sales. These firms have generated roughly 180.5 billion won (approximately $130 million USD) in interest income over the past three years from these loans, which are considered virtually risk-free as they are collateralized by funds that have already been settled or are in the process of settlement.

During the first four months of this year, a period marked by a booming stock market, these firms already collected about 53.6 billion won in interest. While securities companies argue that they must charge interest because the funds are not yet fully settled and they are lending out assets, critics point out that the near-zero risk associated with these loans does not justify double-digit interest rates.

The current system, where the stock market settles trades two business days after the transaction (T+2), allows these firms to operate this lending model. Although a proposal to shorten the settlement period to one day has been made, citing international trends in countries like the U.S., India, and Europe, securities firms cite the need for complex system redesigns and reconciliation processes as reasons for delay.

The article argues that maintaining the T+2 settlement period effectively transfers the costs and risks associated with settlement processes from securities firms to individual investors, who are forced to pay high interest on their own money. It calls for swift improvements to eliminate the practice of charging high interest on loans against stock sale proceeds, even as the broader settlement period reduction is still under consideration.