Briefing

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    Policy Direction for Capital Market Reform
    April 29, 2015
Policy Direction for Capital Market Reform<br>FSC Chairman Yim Jong-yong<br>April 23, 2015
Today's briefing is about the government's policy direction for capital market reform
and measures to facilitate the KONEX market
which were discussed at the Financial Reform Committee and Economic Ministrial Meeting yesterday.
On March 17, I have already briefed you on the general plan for financial reform.
And I mentioned that Korea's financial sector will be reformed
in a way that strengthens the role of the capital market.
To such end, capital market issues were selected as the first agenda
to be discussed at the Financial Reform Committee.
Today, I will brief you on the detailed policy directions deliberated at the two meetings.
Moreover, I will touch upon the direction and detailed schedule we are to pursue
in order to reform Korea's capital market.
It would have been better if I talked about these matters at the previous briefing
but I'm afraid that I couldn't do so due to time constraints.
I guess it might be helpful for you to understand the relationship
between the detailed tasks and the bigger picture for capital market reform.
So, I will first go over the general direction to reform the capital market
to help your understanding of the detailed agenda
which is also listed at the later part of the handout.
Please refer to the printed documents handed out to you.
First, page 1, the background.
Korea's capital market has achieved a remarkable quantitative growth in a relatively short period.
However, despite such development, it has failed to attract as much venture capital investments as initially expected.
Therefore, it wasn't able to play a critical role in leading the economic innovation.
When it comes to market structure, bond market for start-up and venture companies
aren't developed enough to successfully finance companies with excellent technology and ideas.
Also, I believe that all sorts of regulatory burdens and lack of incentives led to deteriorating venture investments.
Next page. t
When it comes to divestment, companies still rely heavily on IPO as a means to recoup investment,
which hampers creation of a virtuous cycle of investment-divestment-and re-investment.
Brokerage firms are too much geared towards securities transaction business.
In other words, because they are too much focused on earning transaction fee
they haven't been able to play the role of bridging venture capital investment.
In general, we need to strengthen capital market's role.
As Korea's population ages, both demand and supply of financial assets such as pension are increasing.
However, financial consumers are still worried about their after-retirement life
because financial products' yield rate is falling due to low interest rate.
What's worse, asset management services aren't mature enough to fully take care of their assets.
Capital market infrastructure isn't much different.
I believe it is necessary to establish an infrastructure
that can strengthen our global competitiveness and enhance market efficiency.
In order to respond to such problems and set future direction for our capital market,
the FSC will reform the capital market.
Detailed tasks for capital market reform.
As of now, the FSC set out 15 tasks for capital market reform.
The tasks were selected based on the problems that we have witnessed and discovered so far.
We will continue developing tasks through discussions at Financial Reform Committee and Financial Reform Council.
First task we will get onto is reforming the KRX structure.
KOSPI, KOSDAQ, and KONEX are the fundamental infrastructures of capital market.
Therefore, we should innovate the way the markets work
and promote competition among those markets.
By doing so, we will be able to facilitate the market.
In particular, for the KOSPI and KOSDAQ to have differentiated competitiveness,
we will come up with measures to ensure independence in their operation and organization
so that both markets can engage in a healthy competition for the better.
To do so, we launched a task force comprised of experts in the securities industry in March.
The FSC and FSS are working hard as well.
Second, we will facilitate venture capital investments.
I believe it is the most important role of the capital market,
and it is the area that we should develop further.
We plan to remove obstacles hampering venture investment for financial firms.
We will vitalize trading of non-listed shares and private equity bond
so that companies can invest, divest, and re-invest through the capital market.
Third, the FSC will improve efficiency of financial asset management.
Above all, we will ensure free and independent operation of PEF.
Bills related to overhauling PEF regulations are under discussion at the National Assembly right now.
We will try to pass the law as soon as possible.
Taking a step further, we will improve the current regulations
to upgrade Korea's PEF to the level of the advanced economies.
As you all know, I believe PEF functions as a liason among different financial systems of the market
such as the banking, securities, and insurance sectors.
To such end, PEF has to play an important role,
so that our financial markets can function well.
With such awareness, we will improve related regulations.
Next page.
We will consult with other relevant ministries
to improve structure of pension funds such as retirement and national pensions.
As I told you last week, there is an organization for this called Financial Reform Council
which comprises of various government bodies.
Centered by the council, the government will discuss ways
to improve participation of domestic financial firms in pension fund operation,
ways to achieve shared growth between the pension fund and financial industry,
and how to increase returns ratio of the pension funds to improve people's after-retirement life.
We will closely coordinate with the relevant government bodies.
Fourth, we will pursue to enact electronic securities act
to increase efficiency of capital market trading
and strengthen investor protection.
Moreover, we will improve disclosure system in a way that enhances corporate autonomy
and enforces responsibility related to unfaithful disclosure at the same time.
We will also devise guideline related to exercising shareholder rights for institutional investors.
Lastly, fifth, we will focus on enforcing roles of market participants
including brokerage firms and asset management companies.
By doing so, we will strengthen brokerage firms' functions of
supporting the real economic growth and managing assets.
Moreover, we will increase support for asset managers to expand business overseas.
Financial investment sector's competitiveness will be strengthened
so that they can lead the financial industry's growth.
General plan is well written on the handouts.
Reading the press release will help you understand better.
Next. Detailed plan.
As I told you on March 17th, we will reform the financial sector in a swift manner.
In particular, the three government bodies including Financial Reform Committee, Council, and Inspection Team,
plus a consultative body called Financial Reform Panel
will thoroughly review the 15 tasks for capital market reform.
Detailed plan will be announced in September based on the discussion results.
I thought it might be better to officially tell you about specific schedule
and plan for capital market reform right here
so that we can work with more responsibility and finish our work until the date we promised.
So, please be reminded of the future schedule.
To such backdrop, there are 3 tasks we are about to announce today.
Those are measures to facilitate the KONEX, over-the-market, and derivatives markets.
I would like to remind you that the 3 tasks are all related to
restructuring KRX markets and vitalizing venture capital.
Let's get into those tasks in more details.
Measures to facilitate the KONEX market.
The KONEX is a market for institutional investors investing in startups and SMEs.
There is a chart to help your understanding.
It illustrates the growth stages of technology venture companies
and the role of the capital market at each stage of the development.
At the early stage, startup investments such as angel investment
and venture capital become the main source of funding.
It would be risky if those startup company shares are left to be traded in the stock market
so, such stocks are mainly traded by professional investors through OTC markets.
We plan to launch a OTC transaction platform to vitalize investments in startup companies.
I will go over this again later.
Development stage is when a company has a relatively decent structure
and moving towards stable profit structure.
At the development stage, such companies can finance through the KONEX market
and we will ensure that the market can fulfill such role.
To such end, our plan focuses on facilitating the KONEX market
to better support companies at their development stage.
Companies at the mature stage have stable profit structure
and their main channel for financing is the KOSDAQ market.
Such companies can finance large scale funds from the KOSDAQ market.
In order to Improve the KOSDAQ market structure, as I told you a while ago,
we need to restructure the KRX system which is also a key task for capital market reform.
Next.
The KONEX market, since its launch, has grown rapidly in size
and we beilieve that it has been fulfuling its purposes relatively well.
But it is true that there is much to be improved.
First of all, turnover is low.
In order to be able to evaluate companies' true value,
the market has to be vitilized.
And companies should be able to recoup investment easily.
Moreover, most of the companies listed on the KOSDAQ at their mature stage already
so, startup or development stage firms have difficulties to enter the KOSDAQ market.
Next are the solutions to such problems.
In order to facilitate the KONEX market,
we will expand both suply and demand.
First, in terms of demand,
we will lower the entry barrier to the KONEX market for individual investors.
The deposit regulation for KONEX investment
will be eased to KRW 200 million from the current KRW 300 million.
A 'small investment account' will be introduced
to allow individual investors with less than KRW 100 million of deposit to make investments.
Once you open the account, you will be allowed to invest in the KONEX up to KRW 30 million per year.
Next.
Now, startup companies has to have a designated advisor in order to be listed,
However, there are companies with excellent technology
having difficulties to list their company
because they can't get a designated advisor.
For such companies, we decided to introduce a special listing system,
which allows listing without a designated advisor.
Under the program, a company can attract more than 20 investment
from a qualified institutional investor designated by the KRX.
Once they get a high technology ratings from a technology ratings agency,
they can list their company without a designated advisor.
This way, we will lower the entry barrier to the market.
Moving on.
Related to encouraging participation of individual investors in the KONEX market,
you believe some of you might have a doubt.
It is a concern also raised at the FInancial Reform Committee, Council, and the Economic Ministrial Meeting.
It is a concern related to investor protection resulting from increased individual investor's participation.
To achieve our ultimate goal of facilitating the KONEX market
to vitalize venture capital investment and provide a source of investment for individual investors,
we decided to establish various safety measures
to protect individual investors who have less capability to bare huge risks.
First of all, in case of retail investors with KRW 100 million deposit,
we limited the maximum amount of loss to a certain level
by allowing them to invest upto KRW 30 million a year.
And, to encourage institutional investors to invest with their own responsibility,
we will provide incentives for securities companies to produce more corporate analysis reports.
For instance, in the past, when the KOSDAQ produces a analysis report on a company traded in the market,
the KRX used to buy the report and provided it to investors.
More incentives will be given to brokerage companies to encourage them to more acurately analise KONEX firms
and provide the results to investors.
And, incase of companies listed through special listing system,
the KRX will form a special organization to oversee them
and provide ample investment information to investors.
Moreover, since such companies lack ability and experience related to IPO,
the KRX will support related document works and provide realted education.
Next topic I will fo through is our plan to launch OTC infrastructure
for trading shares of non-listed companies.
Currently, more than 90% of venture capital investment is recouped through IPO.
To such backdrop, in order to go public, a company has to be listed on the stock market
but it is now easy as it seems.
Even though we significantly lowered entry barriers,
there might be difficulties that startups can't easily overcome.
Such problem can be resolved through OTC trading.
That is why we thought of a measure related to OTC trading
to provide them various channel for divestment.
Main idea of the plan is to provide a platform
where stocks of non-listed SMEs can be freely traded.
It will be established through cooperation with the KOFIA and 10 securities companies.
A trading platform called K-OTC BB will be launched on next Monday
starting with 75 companies available for transaction.
Upon request from investors, the requested company will be immediately added-on.
Ultimately, all non-listed stocks will be traded in the system.
Let's move on to the plan to facilitate derivatives market.
So far, the government have been putting a lot of efforts and implemented improvement measures
to abolish speculative trading of derivatives products and ensure market stability.
And many of those efforts, as you all know, have reaped fruitful results.
However, on the other side, there are voices concerning deteriorating market vitality and function.
As stock indices improved, the minimum quotation of KOSPI200 Futures Options went up to KRW 130 million per unit
which led to falling transaction volume.
Low transaction volume resulted in worsening market vitality.
Some people complain that there aren't enough hedging instruments
and derivatives products for arbitrage transactions.
Problems are raised related to the derivatives market's link to the spot market.
Now, based on our efforts so far,
we plan to vitalize the derivatives market and strengthen its function of supporting the spot market.
I will tell you about the detailed plan.
Let me explain the details.
First of all, we will help retail investors invest in KSOPI 200 futures
and options more conveniently
and also provide sophisticated tools for hedging risks.
To this end, Mini futures and options will be introduced
with a one-fifth trading uint of the KOSPI 200 products.
There might be a concern that the introduction of Mini products
could lead to increase in speculative tradings.
To deal with such concerns, we have taken measures to strengthen market soundness.
For example, individual investors are required to deposit at least 30 million
to invest in futures and options.
They must take 50-hour education sessions.
They have to exercise through a mock trading before they jump into actual trading.
Such safety measures will be continuously upheld.
We expect such safety measures will prevent excessive speculative trading.
In the past, there were cases of market abuse using high-frequency trading,
the so-called 'scalper'.
To prevent such a market abuse, we already heave measures in place.
For example, dynamic price bands.
Such measures will be strengthened or improved to keep market sound.
As you see in the handout, we plan to reform the trading commission structure
to curb speculative trading in the derivatives market.
I will not go into details about this today.
To satisfy demand for risk hedging through derivatives,
we will introduce new derivative products
such as KOSDAQ equity futures, dividend index futures and RMB futures.
With such new derivative products, we aim to revitalize the derivative market
and provide more liquidity so that the market could further develop in depth.
To summarize policy effect that we expect with three policy measures announced today,
it is expected to boost venture capital investment
by diversifying divestment channels corresponding to each stages of a company's life cycle.
Ultimately, we expect a virtuous cycle of investment, divestment and re-investment
that will enable early-stage startups to raise capital through capital markets.
Also, we expect the measures to provide investors with more opportunity
to earn better returns in the era of low interest rate,
laying a reliable investment tools to attract more venture capital.
Last, it is expected to contribute to securing the growth driver of Korea's capital markets
by strengthening the competitiveness of the derivative market
and its role of supporting the spot market.
Please refer to the implementation schedule on the handout.
We will promptly implement the measures to vitalize the KONEX.
The KONEX measures will be taken into action as late as June.
The new trading platform for unlisted stocks will be launched on Monday next week.
Follow-up measures to introduce new derivative products will be set out in the 3rd quarter of this year.
Besides the three policy tasks I briefed today,
we will push forward the remainder of the 15 policy tasks we picked
and additional measures in a speedy manner.
I would like to stress again that capital market reform will be carried out
with a strong will in an effective manner.