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Dec 06, 2012
- First Annual Status Report on the Hedge Fund Industry
- RECENT TRENDThe total asset size of Korea’s hedge fund market has grown to KRW 1 trillion with 12 active management companies with 19 registered funds in a year since it started from KRW 149 billion with 9 fund management companies with 12 funds. (unit: KRW 1 billion) Dec 2011 Mar 2012 Jun 2012 Sept 2012 Nov 2012 total assets 2,370 5,509 6,546 7,858 10,175 (percentage*) (0.2%) (0.5%) (0.6%) (0.7%) (0.8%) no. of funds 12 17 19 20 19 (no. of mgmt (9) (11) (11) (12) (12) companies) * Percentage of asset size of hedge funds out of the total private equity industryHedge funds’ management strategy and investors have been diversified for the last year. Most of hedge funds still rely on long- short strategies; however, the industry plans to sell funds using a variety of strategies such as arbitrage trading and event-driven strategies.Investors’ pool is widening from prime brokers and affiliated companies with brokerage firms in the early stage to institutional investors and affluent retail investors.EVALUATIONThe hedge fund industry made a soft landing in Korea’s capital markets, dismissing initial concerns that the introduction of hedge funds might increase market risks. Hedge fund managers are building their reputation in the market with differentiated performance. As track records of funds with good performance build up, the size of assets under management for such funds is expected to increase.With improved market perceptions about hedge funds, investors’ pool is expected to be expanded to corporations and pension funds.POLICY DIRECTION AHEADIn order to attract capable managers, requirements for approving hedge fund management were relaxed as announced in July 2012. With the eased requirements, the approval process will be completed for asset managers that submit application in December by the end of this year.It is expected a total of 23 firms including 12 asset management companies, 5 brokerage firms and 6 advisory firms will submit application for hedge fun
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Nov 22, 2012
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Oct 23, 2012
- Legislation Notice of Covered Bonds Act
- BACKGROUNDSince the global financial crisis, there has been growing need for a legal framework to issue covered bonds in order to ensure financial institutions’ stable funding channel and financial markets’ stability.1 Covered bonds are expected to reduce financial institutions’ funding cost and serve as a stable funding channel in the event of financial crises. It is also expected that covered bonds will help improve the structure of household debt by providing financial institutions with a funding source of long-term and fixed rate loans.KEY CONTENTS1. Definition of covered bondsCovered bonds are a type of bonds secured by a cover pool of assets that the issuer provides as collateral. In the event of the issuer’s bankruptcy, investors have a preferential claim to the cover pool and are guaranteed dual recourse to the issuer’s other assets as well.2. Eligible issuers of covered bondsIn order for a financial institution to issue covered bonds, it should satisfy both institutional and eligibility requirements.- (institutional requirement) banks, Korea Housing Finance Corporation, Korea Finance Corporation, and other equivalent institutions designated by Presidential Decree- (eligibility requirement) a financial institution with equity capital of more than KRW 100 billion and a BIS ratio of more than 10 %, capable of ensuring proper funding, operation and risk management.3. Cover poolA cover pool is composed of cover assets, liquid assets and other assets with a minimum coverage ratio of collateral more than 105%.- (cover assets) mortgage loans, debts issued by governments and public institutions, government bonds- (liquid assets) cash, certificates of deposit issued by other banks with a maturity of less than 100 days- (other assets) recovery from cover assets, property earned through management, operation, and sale of assets, derivative contracts for hedging against currency and interest rate risks4. Registration and issuanceAn issuer should register its i
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Oct 12, 2012
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Sep 27, 2012
- Plan for Revision to Regulations on Supervision of Banking Business
- BACKGROUNDThe FSC/FSS started to revise the Regulations and Detailed Regulations on Supervision of Banking Business for domestic implementation of the Basel III rules, which will take effect in 2013.KEY REVISIONS1. Revision of minimum capital requirementMinimum capital requirement for banks will be subdivided from the current 8% of the total capital into three criteria: 4.5% of common equity Tier 1, 6% of Tier 1 capital, and 8% of the total capital.2. Introduction of capital buffer1Banks will be required to reserve an extra capital buffer of 2.5%p in addition to the minimum capital requirement. Unlike minimum capital ratios, capital buffer is not a mandatory requirement; however, if banks fail to meet capital buffer requirement, they will be limited in dividend payment or share repurchase.3. Revision of conditions for corrective measures to be taken and evaluation of management status(1) Conditions for corrective measures to be takenCurrently, banks are ordered to take corrective measures depending on their equity capital ratios: management improvement recommendation for less than 8%, management improvement requirement for less than 6%, and management improvement order for less than 2% of equity capital.With the implementation of Basel III rules, such conditions will be further subdivided into three criteria: total capital ratio, Tier 1 capital ratio, and common Tier 1 capital ratio. Corrective measures Current Proposed revision Management improvement Less than 8% of BIS ratio 1. less than 8% of the total capital 2. less than 6% of Tier 1 capital recommendation 3. less than 4.5% of common Tier 1 Management improvement Less than 6% of BIS ratio 1. less than 6% of the total capital 2. less than 4.5% of Tier 1 capital requirement 3. less than 3.5% of common Tier 1 Management improvement order Less than 2% of BIS ratio 1. less than 2% of the total capital 2. less than 1.5% of Tier 1 capital 3. less than 1.2% of common Tier 1 (2) Evaluation of management statusUnder the
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Sep 25, 2012
- FSC/FSS to Tighten Rules on Commercial Papers
- BackgroundCommercial paper (CP) is an unsecured promissory note issued by companies, based only on corporate credits with no collateral backed. It is widely sold by firms for short-term funding needs as the paper requires simpler selling process than corporate bonds.CP issuance shrank temporarily after the Asian financial crisis and the credit card turmoil, but it resumed its growth trend since 2005.However, loose disclosure regulations and lack of transparency in the CP market boosted concerns over risk management and investor protection, as well as improper CP sales.The financial regulator recognized the need to find vulnerabilities in the CP market and develop measures to improve transparency and investor protection.Tighter Rules on CPThe financial regulator will tighten rules on disclosure requirement for CP in a bid to improve transparency in the CP market. It will also strengthen regulation and supervision of CP issuance and support fully-disclosed electronic trading in CPs.Currently, an asset-backed commercial paper (ABCP) issuer discloses trade data and credit rating on the homepage of Korea Financial Investment Association on the day of issuance.From October, an ABCP issuer will be required to disclose more information on the paper, including financial soundness of issuers, collateral assets and specification on product structuring as well as credit ratings.The regulator will push for amendments to Financial Investment Services and Capital Markets Act, which will make it mandatory to disclose the credit rating summary on the FSS’s DART.Currently, brokerages have no reporting obligations for ABCP transactions and the regulator is limited in its ability to monitor the CP market and respond immediately. From next year, brokerages will be required to report details on ABCP transactions.In addition, one-stop inquiry system for CP issuance will be up and running from October to provide investors information including CP’s credit ratings, collateral assets and
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Sep 06, 2012
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Aug 22, 2012
- Key Improvements to the Short-term Benchmark Rate System
- BACKGROUNDThe FSC created a joint taskforce with affiliated agencies, the academia and industry groups on July 19, 2012 to come up with plans to improve the current system of short-term benchmark rate. The taskforce held its fifth meeting on August 21 to announce three major improvements out of various proposals discussed so far.KEY IMPROVEMENTS1. Introduction of short-term COFIXThe Cost of Funds Index (COFIX) was first introduced to replace the certificate of deposit (CD) rate in loan markets. As a benchmark lending rate, COFIX reflects banks’ costs of funding. However, an average maturity of loans linked to COFIX is nine to ten months, and COFIX is announced only once a month. Therefore, for floating-rate loans with shorter maturities less than one or two years, the CD rate is still preferred to COFIX.As a complementary measure, a short-term COFIX will be newly introduced, which will be announced every week. The short-term COFIX reflects banks’ average funding costs for short-term lending with a three-month maturity. The first announcement of the short-term COFIX is scheduled for the first week of November this year, tentatively.2. Stimulation of issuance of brokered CDsBanks agreed to issue brokered CDs to keep an average balance to a level of KRW 2 trillion. In order to enhance validity of the CD rate, 50% of the newly issued CDs worth KRW 1 trillion will be issued in brokered CDs with a three-month maturity.3. Improved calculation of the CD rateThe Korea Financial Investment Association will create basic principles on quote submissions, and improve the way the CD rate is calculated in a more valid and transparent manner.The basic principles and stricter disclosure rules will be in place by September this year. The FSC will pursue amendment to the supervisory regulations on the benchmark rate in the second half of this year.*Please read the attached file for details.
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Aug 17, 2012
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Jul 19, 2012
- Analysis of Korea's Househod Debt and Policy Response
- BACKGROUNDKorea’s household debt has grown rapidly since the Asian financial crisis compared to the growth rate of Korea’s GDP and income, posing a potential risk to our economy. It has been also pointed out that Korea’s household debt is structurally vulnerable as household loans are mostly composed of floating-rate, lump-sum payment, and interest-only loans.Against this backdrop, the government took a set of measures to take the household debt growth under control.Last year, the ceilings on debt-to-income (DTI) ratios, temporarily eased, were reinstated in March. In June, the government took measures to curb household borrowing in the non-banking sector, while strengthening microfinance programs in order to ensure low-income households’ accessibility to financial services.Building on such measures, the government came up with a comprehensive package of measures in June 2011 to ensure a “soft landing” for the household debt risk, which includes properly managing total liquidity, improving households’ ability to repay their debt, strengthening financial institutions’ soundness, and reinforcing microfinance programs.With the recent economic slowdown and slow recovery of household income, there are limitations in taking drastic measures to curb household debt growth. There are also concerns raised about low-income or elderly borrowers’ ability to repay their loans.ANALYSIS OF HOUSEHOLD DEBT TRENDS1. OverviewIn 2011, Korea’s household debt grew at 8.1%, slower than 8.7% in 2010; however, household debt-to-GDP ratio and household debt-to-disposable income slightly rose1 as GDP and disposable income did not grow sufficiently in 2011.However, since the second half of 2011, the growth rate of household debt has slowed down.2 In the first quarter of 2012, outstanding household loans decreased for the first time in three years since 2009.The structural weakness of household debt has also been quite improved. The ratio of fixed rate loans by banks rose fro
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Jul 09, 2012
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Jul 04, 2012
- New Scheme for Credit Card Merchant Fees
- BACKGROUNDMerchant fees on credit card transactions have been charged based on a sector-basis since the merchant fee scheme was first introduced in 1978. However, the sector-based fee scheme has been under criticism that the criterion is unclear and unreasonable. With the widening gap in merchant fees between large retailers and small merchants, it has been continuously argued whether the fee scheme is fair and appropriate.In an effort to overhaul the fee structure, the FSC made revision to the Credit Finance Business Act in March 2012, providing the legal grounds for revising the credit card merchant fee scheme for the first time since 1978.NEW SCHEME FOR CHARGING MERCHANT FEESSince then, a task force made up of market participants and the academia came up with the following new scheme.Credit card companies shall charge reasonable fee rates to each individual merchant, following the basic principles and standards proposed by the FSC.Large retailers1 are prohibited from asking credit card companies unfairly low fee rates, taking advantage of their dominant power. They are also forbidden from asking any kind of compensation in return for paying merchant fees to credit card companies.For small merchants with annual revenue of up to KRW 200 million, the preferential fee rate of 1.5% will be charged, compared with the current rate of 1.8%.EXPECTED OUTCOMESAs the sector-based merchant fee scheme is changed to an individual merchant-based fee schemes, we expect merchant fees will be charged in a fair and reasonable manner.Under the new rules, 96% out of 2.2 million merchants in total will be charged lower fee rates. The gap in merchant fees between large and small merchants will be reduced from the current 3%p to 1%p.As fee rates charged to small merchants are significantly cut, 68% out of 2.2 million merchants will benefit from lower rates.Card companies will refrain from excessively issuing credit cards and expanding businesses.UPCOMING SCHEDULE- Legislative notice of r
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Jun 27, 2012
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Jun 21, 2012
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Jun 19, 2012
- FSC Plan in line with Principles for Financial Market Infrastructures Issued by IOSCO-CPSS
- BACKGROUNDThe International Organization of Securities Commissions (IOSCO) and the Committee of Payment and Settlement System (CPSS) announced Principles for Financial Market Infrastructures (FMIs), new international standards for payment, clearing and settlement systems.With the growing importance of FMIs’ management of crisis and risk after the global financial crisis, the IOSCO and the CPSS established stronger principles for FMIs combining the existing sets of international standard and recommended member jurisdictions to reflect the new principles into domestic supervisory standards by 2012.PRINCIPLES FOR FINANCIAL MARKET INFRASTRUCTURES1. General organizationAn FMI should have a clear legal basis for its major activities, transparent governance arrangements, and a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational and other risks.2. Credit and liquidity risk managementAn FMI should secure sufficient financial resources to deal with risk and have appropriate system to manage collateral and margin deposits.3. SettlementAn FMI should provide clear and certain final settlement, at a minimum by the end of the value date and strictly manage risks associated with payment and physical deliveries of securities.4. Central securities depositoriesA central securities depository (CSD) should have appropriate rules and procedures to help ensure the integrity of securities issues and minimize the risks associated with the safekeeping and transfer of securities.5. Default managementAn FMI should have clearly defined rules and procedures to manage a participant’s default.Trusted assets should be kept separately by each participant.6. General business and operational risk managementAn FMI should hold sufficient liquid net assets funded by equity to cover potential general business losses and have appropriate systems to identify plausible sources of operational risk, both internal and external, and mitigate their impact.7. Acce
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Jun 14, 2012
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May 31, 2012
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May 07, 2012
- Four Mutual Savings Banks Ordered to Suspend Operations
- In a provisional meeting held on May 6, 2012, the Financial Services Commission (FSC) ordered four mutual savings banks – Solomon, Korea, Mirae and Hanju – to halt operations for six months to improve their finances after determining them as “financial institutions in distress”.The order came as a result of the inspection by the Financial Supervisory Service (FSS) and a joint committee’s review on six mutual savings banks, which were ordered on September 18, 2011 to normalize their business operations within a grace period. The suspended four mutual savings banks were among the six.Background and ProgressThe government cleaned up nine troubled mutual savings banks – Samhwa, Busan, Daejeon, Busan II, Jungang Busan, Jeonju, Bohae, Domin, Kyongeun – in the first half of 2011 to resolve the mutual savings bank issue.For the seven weeks from July 5 to August 19, 2011, a management assessment taskforce consisting of the FSS and the Korea Deposit Insurance Corporation (KDIC) inspected 85 mutual savings banks’ management situations* in a preemptive move to remove uncertainty about mutual savings banks.* Out of 98 savings banks in operation as of end-June 2011, 13 savings banks were exempted from the inspection as they already went through inspections in the first half of 2011.On September 18, 2011, the FSC suspended business operations of seven mutual savings banks – Daeyeong, Ace, Prime, Parangsae, Jeil, Jeil II and Tomato – for six months, out of 13 mutual savings banks which had been determined as in distress subsequent to the inspection by the FSS and the review of their management improvement plans.The remaining six savings banks were given a grace period before being ordered to shut down their operations, consequent to the management assessment committee’s approval and a possibility of independent normalization.The FSS conducted inspections of the six savings banks to assess their progress on management improvement plans and additional distress f
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Apr 30, 2012
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Apr 16, 2012
- Establishment of Korea New Exchange
- The FSC announced its plan for creating a stock exchange exclusively for SMEs, tentatively named ‘Korea New Exchange (KONEX)’, in order to facilitate direct financing of venture start-ups and SMEs through the capital market.BASIC DIRECTIONS OF THE PLAN- Provide investors with new investment opportunities by facilitating listing of SMEs with high growth potential- Reduce the costs of listing and maintaining the listing for SMEs- Establish a credible market with fair pricing mechanismKEY SCHEMES FOR KONEX1. Broaden the scope of ‘professional investors’- ‘Professional investors’* under the definition of the Financial Investment Services and Capital Markets Act (FSCMA)*financial investment firms (e.g. securities companies), mutual funds, policy banks (e.g. Korea Development Bank, Industrial Bank of Korea, Korea Finance Corporation), banks, insurance companies, pension funds (e.g. National Pension Service)**In principle, retail investors are allowed only indirect investment through mutual funds.- Among investors who are not ‘professional investors’ by the definition of the FSCMA, those with investment expertise in SMEs or risk-absorbing capability will be allowed to invest in KONEX-listed SMEs.i) ‘venture capital’ under the definition of the Support for Small and Medium Enterprise Establishment Actii) retail investors qualified for hedge fund investment more than KRW 500 million2. Set minimum requirements for listing and delisting- (Listing) The audit opinion on a company’s financial statement is proper; a company satisfies listing requirements on a selective basis in regard with equity capital, financial conditions and business performance; and etc.- (Delisting) A company falls into one of conditions for immediate delisting such as the court’s decision of dissolution or refusal of rehabilitation procedures; the audit opinion on a company’s financial statement is adverse or disclaimer of opinion; and etc.3. Designate advisors to assist SMEs’ l
