Press Releases - Financial Services Commission

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May 27, 2011

Additional Measures to Improve the Soundness of ELW Market

BACKGROUNDAs Korea’s ELW market has rapidly grown in a short period of time, problems such as overheated investment and soaring investment losses have surfaced; therefore, the FSC introduced some measures (e.g., introduction of mandatory investor orientation course, stricter assessment of LP performance and preventive measures against potential unfair trading practices) in November 2010 to create a sound market environment for ELW trading.Since the implementation of the measures above mentioned, the trading values of ELWs declined somewhat as shown below:* KRW 1.7 trillion (Aug 2010) → KRW 1.9 trillion (Sep 2010) → KRW 2.0 trillion (Oct. 2010) → KRW 1.6 trillion (Nov. 2010) → KRW 1.4 trillion (Dec 2010) → KRW 1.3 trillion (Mar 2011)* Daily average number of suspicious trading: 0.84 cases (Oct 1, 2011 ~ Dec 10, 2010) → 0.13 cases (Dec 13, 2010 ~ Feb 28, 2011)However, despite these measures, as a result of some securities companies giving a preferential treatment to scalpers (the prosecutor pointed out that some scalpers bribed the securities companies so that they could have access to dedicated lines to route their orders faster than others), concerns about the soundness of ELW market have resurfaced. Against this backdrop, and we plan to adopt the following measures.PLANS TO IMPROVE CURRENT PRACTICES RELATED TO ELW MARKET AND ORDER ROUTING SPEED◈ Basic deposit requirement will be introduced as an entry barrier to ELW market investment and existing market practices will be revised to help investors easily compare ELW prices.◈ In regard with speed of order routing, brokerages will be allowed to provide only a reasonable range of service to make sure all investors can have a stable and equal access to trading system.I. SOUNDER MARKET ENVIRONMENT FOR ELWS1. Stronger Protection for Investors A. Basic Deposit RequirementIn most of derivatives trading, investors are required to make basic deposits in addition to margins.* However, for ELWs and buying opti
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May 19, 2011

Korea to Chair FSB T/F on EMDE Issues

BACKGROUNDThe G20 leaders at the Seoul Summit held in November 2010 agreed to put financial regulatory reform issues viewed from the perspectives of emerging countries on G20 agenda ,and asked the FSB, IMF and World Bank to submit a progress report prior to G20 Cannes Summit in November 2011.Recognizing that G20 discussions had been mainly focused on how to overcome financial crises in advanced countries, Korea proposed that financial issues relevant to emerging countries need to be more actively discussed at the G20 meetings.TASK FORCE FOR EMERGING MARKET AND DEVELOPING ECONOMIES (EMDES)Against this backdrop, the FSB created a task force to deal with EMDE-specific issues in March 2011. The T/F is to select financial regulatory issues from the perspectives of EMDEs and make relevant policy recommendations.Groups of technical experts will be created within the T/F to conduct in-depth reviews on specific issues.** management of capital flows and foreign exchange risks, prudential oversight on global financial institutions, supervisory cooperation between home and host countries, implementation of international standards, development of capital markets, etc.The T/F is composed of international organizations (IMF, World Bank, BCBS, IAIS, IOSCO, BIS, ECB); and FSB members (Korea, the U.S., Canada, Japan, China, India, Brazil, Indonesia, Mexico, Russia, Saudi Arabia, Spain, North Africa, Argentina, etc)Korea’s FSC was appointed as chair of the T/F in May 2011, and FSC Standing Commissioner Sangche Lee will be representing Korea and preside over discussions in the T/F.The T/F is scheduled to submit an interim report to FSB Plenary Meeting on July 19, 2011. The report will be circulated to FSB regional consultative groups for review by September, and the final report will be completed prior to G20 finance ministers’ meeting in October and G20 Summit in November.*Please read the attached file for details.
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May 17, 2011

Privatization Plan for Woori Finance Holdings

BACKGROUNDThe Public Funds Oversight Committee has held the 34th Meeting today and decided to re-initiate the sale of the Korea Deposit Insurance Corporation’s 56.97% stake in Woori Finance Holdings.GENERAL PLANA. Upholding the three main principles for the saleThey are as follows: Maximizing the recovery of public funds; Speeding up the privatization process; and Contributing to the development of the domestic financial sector.B. Selling the group as a packageThe committee has come to a conclusion not to sell the group’s subsidiaries separately, instead put the group up for sale in its entirety with ten of its subsidiaries intact. This is to simplify the sales procedure and minimize uncertainties of the process.C. Setting the minimum bid of 30%To reaffirm government’s intention to sell the group’s controlling stake, the minimum bid acceptable on the Letter of Intent is set at 30% of the group’s total share.D. Cancelling the MOU held by KDICThe KDIC’s MOU governing the Woori Finance Holdings will be either cancelled or alleviated depending on the reduction of KDIC’s stake.SCHEDULEThe public notice of sale for the group will be announced on May 18, and LOIs will be accepted for six following weeks ending on June 29.*Please read the attached file for details.
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May 17, 2011

Internal Rules on Corporate Governance in Banks

BACKGROUNDCorporate governance in banks can have a significant impact on the interests of shareholders and customers; therefore, banks’ governance rules need to be made public.In order to enhance the transparency of banks’ corporate governance, the FSC has revised the Banking Act on November 18, 2010 to require banks to establish and publicize their internal rules on corporate governance. Banks are required to have internal governance rules in place by May 17, 2011 and make a public notice on their websites and the Korea Federation of Bank’s.MAIN CONTENTS OF INTERNAL GOVERNANCE RULESBanks are given discretion to stipulate more details about what they are mandated under the Banking Act (Article 23-4) and the Enforcement Decree (Article 17-4) of the Banking Act.1. Executives(mandatory) qualifications for executives, principles and procedures for appointment and retirement of executives, training programs for executives and candidates, performance evaluation(optional) qualifications for key executive members of banks e.g. president, vice president, and auditor *; developing a “management succession program”***Given that the mandatory introduction of age limits for executives might undermine the autonomy of banks’ management and basic rights of executives, whether to introduce age limitations for executives is left to the discretion of each bank. For consecutive terms, however, stricter standards based upon performance evaluation during preceding terms will be applied to candidates’ qualifications to be reappointed.** The succession program will include how to elect substitutes or successor in the absence of executives; how to select candidates for executives; and how to utilize results of training and performance evaluation, etc.2. Composition and operation of board of directors(mandatory) composition of the board, qualifications for directors, standards and procedures for appointment and retirement of directors, evaluation of performance of the board(opt
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May 02, 2011

Project Financing Stabilization Bank

1. IntroductionThe main purpose of creating the Project Financing Stabilization Bank (“the PFS Bank” hereafter) is to create an entity where all the project financing loans taken out on a project construction site can be pooled together and purchased by one bank, thereby simplifying the valuation and enabling the PFS Bank to take firm actions to restructure and stabilize the industry on an individual project basis.2. Form of establishmentUAMCO(United Asset Management Company), the formerly established private company funded by a group of commercial banks to purchase non-performing loans, will act as the General Partner whereas commercial banks that have lent to the particular project site will act as Limited Partners.3. Participating institutionsBanks that want to sell-off their PF loans.4. Target purchasePriority will be given to commercial-banks-lent PF loans given to contractors currently going under the workout programs. Project sites that have more than 75% of PF loans from commercial banks will be at the top of the purchase list.5. Purchase priceThe purchase price of PF loans will be set at market price negotiated by participating banks.6. Estimated size of the first PFS BankAlthough further analysis needs to be made, exempting project sites that are making progress through their self normalization process, among estimated KRW 1.6 trillion of loan amount by project sites that have borrowed more than 75% of PF loans from commercial banks, setting aside loans that are hard to negotiate a price on, there are roughly KRW 1.0 trillion worth of loans to be purchased by the first PFS bank.7. Funding requirementThere are principally two types of funding requirements for the newly created PFS Bank which will essentially be a private equity fund: costs to purchase the insolvent PF loans; and new funds required to stabilize and revitalize the project site. Participating banks will fund the purchase of insolvent PF loans, and the PFS Bank itself will raise additional
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Apr 18, 2011

Measures to Enhance Low-income Households' Access to Financial Services

BackgroundThe FSC has announced a set of measures to lower financial costs of low-income earners and strengthen the financial safety net. The measures are part of our preemptive efforts to make sure the government’s counterplan against household debt would not curtail low-income households’ access to financial services.Key Contents1. The FSC plans to provide a total of KRW 3.2 trillion this year to support three major microcredit programs: Smile Microcredit; Sunshine Loans; and New Hope Loans2. Credit inquiry records would be no longer taken into the assessment of individuals’ credit ratings.3. Overdue payments of less than KRW 100,000 would no longer affect borrowers’ credit ratings.4. Overdue payments of less than 90 days would be reflected only for three years, currently reflected for five years, in the assessment of borrowers’ credit ratings if debts are fully repaid.5. The FSC will put a cap on loan brokerage fees and strengthen the crackdown on illicit brokerage practices.6. The FSC will lower the ceiling of annual interest rate on loans by financial institutions and private money lenders from the current 44% to 39%.7. The FSC will extend the operation of pre-workout program by two years.8. The FSC will enlarge the scope of beneficiaries of transfer loans that switch outstanding loans with high-interest rates to lower-interest ones, and we will also reinforce the credit recovery program.9. The FSC will expand financial support for those in the credit recovery program to help them stand on their feet if they faithfully perform their duty.10. The FSC will establish a database of financial services for low-income earners and create more education programs to keep them better informed of credit management.Enforcement planThe FSC will take necessary actions to ensure these measures can be enforced as early as possible. However, it would take time to enforce some measures such as setting a cap on loan brokerage commissions that require revisions of related
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Apr 06, 2011

Korean Financial Market Update

1. Recent trends in the stock marketThe KOSPI index, which once fell to a low point of 1,923.30 on March 15 after the Japanese earthquake, has rebounded to a record-high of 2130.43 on April 5, renewing the highest point of 2,115.69 prior to the earthquake.The recent recovery in stock prices is mainly attributed to foreigners’ net buying based on their optimism that the Korean economy is relatively stable amid ongoing external uncertainties such as Japan’s earthquake and political turmoil in the Middle East.2. Foreign investors’ movement in Korean stock exchangeForeigners sold KRW 3.5 trillion in February, the biggest net sale by monthly basis since May 2010, but made net buying of KRW 1.2 trillion in March: notably, net buying of KRW 2.8 trillion after the Japanese earthquake.(By country)Starting this year, there has been a continued outflow of European funds (including the U.K), reflecting ongoing uncertainties in the European region. By contrasts inflows of funds from the U.S. and Asian region have been increasing since March.*As of March, the U.S made a net purchase of KRW 1.3 trillion, Singapore of KRW 0.7 trillion, China of KRW 0.2 trillion*Despite our concern of Japanese capital being pulled back, Japanese made a net purchase of KRW 155 billion instead(By fund-type)In February, all foreign investors except for Asian sovereign funds were net sellers. Starting March, however, the U.S. funds began to make net buying in large volume. Net buying by foreign investors was mostly made after Japan’s earthquake, and European investors (excluding European funds) also turned net buyers of Korean stocks.(By investment period)It has turned out more than half of foreign net buying made after the Japanese earthquake was made by short-term investors. (i.e. investment banks)*Short-term: IB with investment turnover ratio over 500%3. Grounds for foreign investors’ net buyingWithout wider spread of risk from the recent Japanese earthquake and the regional conflict in the
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Mar 30, 2011

Monitoring Results of Domestic Banks' Foreign Currency Financing

OverviewThe Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) have been operating an Emergency Financial Situation Room and holding Joint Financial Check-up Meetings as the need arose to monitor the effects of external risk factors such as earthquakes in Japan, unrest in the Middle East and European sovereign risk on domestic financial markets including foreign currency funding and management of domestic banking industry and foreign exchange market*.*Refer to the press release dated 13 March 2011, “Result of Emergency Financial Check-up Meeting in relation to earthquakes in Japan”Foreign currency funding in the wake of earthquakes in JapanAs of March 20, 2011, domestic banks including foreign bank branches operating in Korea raised U$248.8 billion through foreign currency borrowings and deposits, etc. They had U$214.5 billion in foreign currency-denominated assets under management in the forms of foreign currency loans, trade financing and foreign currency securities, etc.Since earthquakes in Japan on 11 March 2011, foreign currency funding*, mostly through foreign currency borrowings, increased by U$1 billion and foreign currency management** increased by U $2.6 billion. The increase of U$1 billion in foreign currency funding since March 11 mostly resulted from domestic banks raising more foreign currency funds.* U$1.8 billion up in foreign currency borrowings, U$800 million down in foreign currency deposits **U$1 billion up in foreign currency loans, U$1 billion up in trade financing, U$600 million up in foreign currency securitiesAn FSS survey of domestic banks and foreign bank branches conducted immediately after the earthquakes broke out in Japan found that there were no signs of capital outflows. Instead, borrowings from headquarters by domestic branches of four Japanese banks increased U$940 million from March 14 to 25 even after the breakout of earthquakes.In addition, funding conditions for domestic banks remained stable af
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Mar 22, 2011

Financial Measures to Support Normalization of Housing Transactions

BackgroundIn order to stimulate the depressed housing market last year, the government announced the Aug. 29 measures including the temporary easing of the application of debt-to-income (DTI) ratio for mortgage loans. Since the implementation of the Aug. 29 measures, housing transactions have rebounded while household debt including mortgage loans continuously increased.*apartment transaction volume in Seoul metropolitan area (in thousands): 9.0 (Sept 2010)→12.4 (Oct)→17.5 (Nov)→20. 2 (Dec)→16.0 (Jan 2011)→19.0 (Feb)*mortgage lending (KRW in trillions): 2.6 (average from Jan to Aug 2010)→3.3 (Sept)→3.5 (Oct)→4.4 (Nov)→5.3(Dec)→1.8 (Jan 2011)→2.8 (Feb)Key Contents1. The temporary easing of the application of DTI ratio for mortgage loans will be expired at the end of March as scheduled, and the previously-imposed DTI limit* will be reinstated starting April.*the DTI ratio: 40% for speculative area, 50% for non-speculative area in Seoul, 60% for Incheon and Gyeonggi Province.2. The FSC has also come up with complementary measures to support non-speculative housing transactions.1) The raised cap for microcredit loans (from KRW50 million to KRW100 million), exempted from the DTI regulation, will be maintained to make sure that low-income households have no difficulties financing their housing purchase.2) Preferential treatment of higher lending limit using the DTI ratio will be given towards non-grace-period repayment loans along with fixed-rate loans and principal and interest installment loans.*non-grace-period loans: +5%p*fixed-rate loans: +5%p*principal and interest installment loans: +5%p※For example, for non-speculative Seoul area with 50% DTI application, if a mortgage is given out without a grace period and with fixed-rate principal and interest installments, 65% DTI will be applied.Expected EffectsBy reinstating the DTI regulation, the FSC aims to prevent borrowers from borrowing above their means. With the DTI limit back in place, we exp
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Mar 17, 2011

Plan for Strengthened Supervision on MSBs

The FSC has announced its plan for strengthened supervision on savings banks.Key Contents1. To prevent moral hazard of savings banks’ largest shareholdersMany of savings banks’ largest shareholders fall short of funding capability and social credibility and thus many savings banks have been vulnerable to improper practices by their largest shareholders. Therefore, the FSC plans to tighten its regulatory oversight on the biggest shareholders and hold them more accountable for savings banks’ business operations.2. To curb excessive business expansion of savings banks and promote their soundnessWhile savings banks have been engaged in disproportionate investment in high-risk assets and excessive businesses expansion, prudential regulations on them remained loose. In order to promote the soundness of savings banks, the FSC will end preferential treatment in loan caps for some savings banks and strengthen supervision on affiliated savings banks.3. To enhance investor protectionThere have been many claims that investors suffered from lack of transparency in accounting and contracts made based on incomplete information. Therefore, the FSC will better protect investors by strengthening market disciplines and curbing subordinated bond issuance by savings banks.4. To strengthen supervision over the cause of insolvencyThe FSC will closely work with related government agencies to seek civil and criminal charges against savings banks’ largest shareholders and management if they were found responsible for any business failure and misconduct.Details1. To prevent moral hazard of savings banks’ largest shareholders1) When the biggest shareholder is alleged to commit any illegal act, the FSS will be able to launch an investigation into the largest shareholder.- Revision of the Savings Bank Act (to be submitted to the National Assembly for 3Q of 2011)2) The FSC/FSS will ask savings banks’ largest shareholders who have effective control over the management to become registe
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Mar 11, 2011

Amendment to Depositor Protection Act Passed at the National Assembly

The National Assembly approved an amendment to the Depositor Protection Act on March 11, 2011.Key Contents1. Creation of a special-purpose account for savings banksThe revision is to create a special-purpose account within the Deposit Insurance Fund that will be only used for the restructuring of savings banks.2. Funding SourceThe special fund for savings banks will be financed by part of the deposit insurance fees andthe government contribution. Under the revised Depositor Protection Act, each financialsector is required to contribute 45% of their insurance fees to the special account for savings banks, while savings banks are required to deposit 100% of their insurance contribution to thespecial account. The revision has also laid a legal ground for the government to inject publicfund into the special account for savings banks.3. DurationThe special account will be run temporarily until troubled savings banks would be stabilized. Taking into account the period of repayment, the special account will remain valid by December 31, 2026.4. SupervisionThe Korea Deposit Insurance Corporation (KDIC) is required to annually report plans on how to manage the special fund and the results to the Standing Committee of the National Assembly, and publish a white paper on the operation of the special fund.5. LiquidationWhen liquidating the special account, government contribution out of the remaining balance would belong to the national treasury, and the remainder would go to each sector’s insurance deposit accounts (except for savings banks’) by the proportion of contributions they made.6. The revised Depositor Protection Act enters into force on April 1, 2011.*Please read the attached file for details.
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Feb 23, 2011

Unfair Trading Investigation Results and Penalties

Violation of prohibition on market manipulation through the link between spot and futures by KOSPI200 stocks and derivatives trading on November 11, 2010, a KOSPI200 options’ expiry dateCase OverviewAccording to investigation results, AAA1), who is head of Absolute Strategy Group (ASG)- Asia of Deutsche Bank AG Hong Kong Branch, DDD, who is in charge of ASG - Global of New York Deutsche Bank Securities Inc., etc. conspired with EEE, who is managing director of Global Equity Derivatives (GED) at Deutsche Securities Korea, Deutsche Bank AG’s South Korean securities unit, to manipulate market prices in Korean capital markets.They had constructed speculative derivatives positions in advance through the combination of short synthetic futures and long put options. In order to gain profit from these speculative positions, they sold KRW2.4424 trillion (US$ 2.2 billion) worth of stocks listed in the KOSPI200, which they had purchased through index arbitrage trading and held during the last year (2010), in the last ten minutes before the market closed on Nov. 11, 2010, an expiry date for KOSPI200 options.Due to these massive manipulative orders, KOSPI200 index plunged 2.79% (254.62p → 247.51p) and they gained illegal profits of KRW44.87 billion (US$ 40.5 million) from market manipulation through the link between spot and futures (options) transaction.Investigation Activities and Enforcement ProcessA joint investigation team by the Financial Supervisory Service (FSS) and the Korea Exchange (KRX) was organized to commence an investigation on Nov. 12, 2010, the next day on which the incident occurred.- Investigation team members: five staffs in Special Investigation Team of the FSS, two staffs in Review Team 3 of the KRX- In-depth investigations were carried out for about two months from Nov. 12, 2010 to Jan. 21, 2011 which included interviews with involved persons and collecting evidences at the Deutsche Bank AG Hong Kong Branch, which placed massive orders to sell, and D
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Feb 21, 2011

Further Actions Taken on MSB and Support Measures

The Financial Services Commission (FSC) held a provisional meeting on Saturday, February 19, and decided to suspend operations of four additional savings banks: Busan Central Savings Bank; Busan 2 Savings Bank; Jeonju Savings Bank; and Bohae Savings Bank.Liquidity conditions of these four savings banks were not as bad as the two previously suspended banks (Busan Savings Bank and Daejeon Savings Bank); however, there have been massive deposit withdrawals following the announc ment of the two banks being suspended on February 17, so it became evident that these four savings banks would soon become incapable of paying back their customers’ deposits.An emergency meeting chaired by FSC Chairman Kim Seok-Dong convened this morning in Busan with relevant officials and institutions to discuss plans to minimize the impact of savings banks suspensions on depositors and SMEs in the region, and to provide sufficient liquidity for other savings banks.Participants of the meeting: FSC Chairman, Busan City Mayor, FSS Senior Deputy Governor, KDIC President, KIBO CEO, KODIT CEO, Busan Credit Guarantee Federation CEO, Korea Federation of Savings Banks CEO, IBK CEO, Kookmin Bank CEO, Busan Bank CEO, Nonghyup Credit Agency CEO, Busan Chamber of Commerce Deputy CEO and nine other CEOs of mutual savings banks in the region.Support Measures1. For Savings Banks and DepositorsTo minimize inconveniences of suspended savings banks’ depositors,(1) The government will make sure that depositors can receive provisional payments, a portion of deposits protected by the KDIC, in two weeks of suspensions, a week earlier than the standard procedure.(2) In order to meet depositors’ urgent needs for cash before provisional payments, the government will help them get a deposit-backed loan up to KRW 15 million per person from four commercial banks (Kookmin, NH, IBK and Busan Banks). (3) The government will raise a ceiling on deposit-backed loans up to 80% of deposits to meet additional needs for liqu
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Feb 17, 2011

Actions Taken for Mutual Savings Banks

The Financial Services Commission (FSC) held a provisional meeting today and decided to impose 6-month business suspensions for Busan Savings Bank and Daejeon Savings Bank.Busan Savings Bank is affiliated with four other banks: Busan Central Savings Bank; Busan 2 Savings Bank; Daejeon Savings Bank; and Jeonju Savings Bank.Following the outbreak of the financial crisis in 2008 and subsequent real estate recession, financial health of the five savings banks has deteriorated, and as of end-December 2010, Busan Savings Bank’s BIS ratio has fallen to 5.13% while the outstanding liabilities surpass total assets by KRW 21.6 billion resulting in negative equity. Daejeon Savings Bank’s current BIS ratio is -3.18% and its liabilities surpass its assets by KRW 32.3 billion.Daejeon Savings Bank has experienced continued withdrawals of its deposits since D cember2010 and after judging that it is no longer able to payout anymore deposits, it has submitted a formal request for a business suspension to the FSC on February 16, 2011.The FSS plans to start a full investigation today on the suspended savings banks, and actions will be taken to normalize their operations.According to the Act on the Structural Improvement of the Financial Industry, following actions are to be taken for mutual savings banks that failed to meet the 5% BIS requirement.- Below 5% - Business Improvement Recommendation- Below 3% - Business Improvement Request- Below 1% - Business Improvement OrderAside from the two suspended banks, there are five other savings banks that fall short of the 5% BIS requirement: Bohae Savings Bank; Domin Savings Bank; Woori Savings Bank; Saenuri Savings Bank; and Yes Savings Bank, of which three of them: Woori and Saenuri (state-owned) and Yes (held by KDIC) have no difficulties financially. The other two: Bohae and Domin have submitted their business normalization plans and they are making progress. Out of 104 mutual savings banks in operation, apart from the five affiliated
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Jan 11, 2011

Regulatory Follow-Up Measures For Nov.11 Stock Market Plunge

BackgroundThe Financial Services Commission (FSC) and Financial Supervisory Service (FSS) have developed measures to improve derivatives-related trading system jointly with the Korea Exchange (KRX) and the Korea Financial Investment Association (KOFIA) based on the investigation of risk management status of financial investment companies and a public hearing held on December 20, 2010 after the stock market plunged on an option expiry day, November 11, 2010.The latest regulatory measures are designed to prevent the recurrence of a similar event on expiry dates of futures and options contracts and mitigate risks arising from derivatives investment by institutional investors, seeking to keep capital markets sounder and more efficient.Regulators are thoroughly investigating and inspecting alleged acts of unfair trading and violations of asset management-related laws that caused a market plunge on the option expiry day and will take appropriate actions against any violation of laws.Investigation updates1. Investigation of alleged acts of unfair tradingThe FSS conducted an on-site investigation in Hong Kong in December 2010 and is currently working to determine if any act of violating the Capital Market and Financial Investment Business Act, including market manipulation, was involved.Any violation of laws will be punished according to laws, if found.2. Examination of Wise Asset ManagementRight after the option shock incident, examiners conducted a probe into Wise Asset Management from November 12 to December 3, 2010 to identify the cause of the incident and check the adequacy of derivatives fund operation and internal control system.Regulators will complete the analysis of the inspection results as soon as possible and proceed to impose sanctions against any violation, if found.3. Risk management in the financial investment industryThe FSS examined financial investment companies to check their risk management status and whether they were in compliance with the margin rul
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Dec 20, 2010

Proposals to Stimulate Corporate Pension Plans

BackgroundCorporate pension plans are one of the important financial schemes to help retirees lead a financially stable life after retirement. In order to prepare for the rapidly aging population and supplement insufficient public pension plans, it is necessary to stimulate corporate pension services in Korea. In fact, the development of Korea’s corporate pension system remains lukewarm as corporate sponsors still run a severance pay system in parallel with pension plans and they feel the burden of making contributions to a pension fund managed outside the company.The Financial Services Commission (FSC) and the Ministry of Employment and Labor (MOEL) have come up with the following proposals to reform corporate pension plans, based upon what we have discussed at a T/F, which was created on May 28, 2010 as a public-private partnership with the FSS, the industry and the academia to invigorate pension services and encourage fair competition in the market.Major Reform Plans1. Easing regulations on corporate pension fund managementFor Defined Contribution (DC) plans and Individual Retirement Accounts (IRAs), the government will revise related regulations to allow up to 40% of the pension funds to be invested in collective investment securities such as equity-type funds or hybrid funds.**Under current regulations, DC plans and IRAs are forbidden to invest in equity-type or hybrid funds.However, we have decided to continue to prohibit direct investment in equities, considering employees’ limited financial knowledge and asset management capability, and to ensure that pension assets are managed safely.For Defined Benefit (DB) plans, we will keep the current rules of investment ratio (30% for equities, 50% for equity-type or hybrid funds) as the current caps of risk asset investment are sufficient enough to ensure the safe management of the pension funds.With the revision of related regulations, we expect to give pension subscribers a broader range of choices and reflect
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Dec 20, 2010

Macro-prudential Stability Levy

BackgroundThe Korean government plans to impose Macro-prudential Stability Levy (“the Levy”) on non-deposit foreign currency liabilities with three motivations.First, the key factor of the past two financial crises in 1997 and 2008 was sudden capital outflows following excessive capital inflows during boom periods. Like many otheremerging and developing countries with a small and open economy, Korea is highly vulnerable to changes in the global economy and sudden capital movements. Of the various capital flows, overseas borrowings are the most volatile, in particular short-term ones. The Korean government, which has reinforced macro-prudential measures toreduce volatility in capital movement within the framework of an open and liberalized economy, now decided to introduce the Levy.Second, the need to curb massive capital inflows in the form of carry trade into Korea is growing as global liquidity has been rapidly increased by Quantitative Easing measures (QE) and the exceptionally low interest rates in advanced countries. A surge of capitalinflows could lead to inflation and asset price bubbles, and a sudden reversal of such inflows could possibly result in a systemic risk.In addition, the Levy will be used as to provide liquidity when necessary to help the Korean economy cope with external shocks.The introduction of the Levy is consistent with the global trend, in particular with the communiqué of the G20 Seoul summit where the leaders have agreed on the need for design and implementation of macro-prudential measures to curb excessive capital flows. Germany, the United Kingdom and France are about to impose the financial levy from January 2011 with the aim of repairing the financial system or procuring resolution fund. Against this backdrop, the Korean government plans to adopt the Levy as a pre-emptive and precautionary measure to stabilize both financial market and economy as a whole.Key characteristics of the Levy1. ImpositionIn order to strengthen macro-pr
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Dec 17, 2010

Basel III QIS and Its Implications

The Basel Committee on Banking Supervision (“the Committee”) published the results of its comprehensive quantitative impact study (QIS) on December 16, 2010 to ascertain the impact of the Basel III rules on banks’ capital adequacy, leverage and liquidity ratios. A total of 263 banks from 23 of the 27 Committee member jurisdictions participated in the study.In Korea, 8 banks submitted data for the comprehensive QIS including 5 Group 1 banks (Woori, Shinhan, Hana, KB and IBK) and 3 Group 2 banks (Nonghyup, Daegu and Busan).Capital ratios as of year-end 2009Group 1 banks’ average common equity Tier 1 (CET1) capital ratios under the new regime would have sharply fallen from an average gross CET1 capital ratio of 11.1% to 5.7%.This decline is mainly attributable to the new definition of capital deductions and filters not previously applied at the common equity level of Tier 1 capital. For the Group 1 banks, the reduction in CET1 capital is driven primarily by deductions of goodwill, etc.For larger banks (Group 1 banks), the change in net CET1 capital (with deductions) compared to gross CET1 capital (without deductions) amounts to -41.3%. The reduction in C ET1 capital of Group 1 banks from Korea by deductions amounts to 3.2%.In the meantime, CET 1 capital ratio of domestic banks would remain around 10.3% under the Basel III Framework, exceeding a CET1 target level of 7% (including the capital conservation buffer).Average capital ratios by banking group, in percent CET1 Tier 1 Total Change in CET 1 by deductions Gross Net Current New Current New Group 1 Average* 11.1 5.7 10.5 6.3 14.0 8.4 -41.3 Korean banks 11.3 10.3 11.1 10.4 14.7 13.5 -3.2 Group 2 Average* 10.7 7.8 9.8 8.1 12.8 10.3 -24.7 Korean banks 10.4 9.7 10.7 10.0 15.3 13.4 -1.8 *Average of banks from 23 countries Relative to a 7% CET1 level, the capital shortfall for Group 1 banks in the QIS sample is estimated to be €577 billion (KRW880 trillion) under the Basel III requirements (including the capital
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Dec 14, 2010

2011 Financial Policy Agenda

The Financial Services Commission (FSC) has made a publicly open presentation of its policy objectives for 2011 to President Lee Myung-Bak on December 14 at the Blue House.FSC Chairman Chin Dong-Soo unveiled the FSC’s 2011 policy agenda and had in-depth discussion with financial companies for low-income households, the general public, experts, and government officials on how to improve the practical effectiveness of financial support for low-income households.Six Key Objectives for 2011I. Preemptive Actions against Market Risks1. Taking preemptive measures to address problems in household debts and PF loans- Properly manage the pace of household debt growth not to increase exceedingly and eliminate systemic vulnerabilities of household debts by extending loans at longer-term, fixed rates or allowing borrowers to pay off principal in installments.- Prevent PF loans from being insolvent by conducting a more thorough review of business feasibility and reforming construction companies’ practices that have been recklessly providing payment guarantees; and encourage banks to write off bad PF loans as early as possible.- Expand financial restructuring funds by creating a common account for deposit insurance jointly held by individual financial sectors; raising deposit insurance premiums (from 0.35% to 0.40% for savings banks); securing restructuring funds, and strengthening the supervision of the Korea Deposit Insurance Corporation (KDIC).2. Strengthening measures to respond to internal and external risks and conducting a year-round corporate restructuring program- The FSC will strengthen its monitoring of financial markets and measures to enhance Korea’s foreign exchange soundness and to prevent the tipping of capital liquidity into one market. We will also review our contingency plans to counter crises such as Europe’s fiscal crisis or geopolitical risks on the Korean Peninsula.- Continue to conduct a year-round corporate restructuring program led by a group of c
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Dec 07, 2010

Follow-up Measures for November 11

The financial regulators are investigating alleged acts of unfair trading and risk management status of financial investment companies in relation to the selloff on November 11, 2010 that sparked the stock market plunge.Drawing on the consensus that Korea’s capital market should be operated to benefit all market participants, the regulators are now working with affiliated institutions and others for a long term plan to reform the current system while encouraging the industry’s own efforts to stabilize the market.Following are the measures under consideration by the regulators to draft amendments to the current rules or develop guidelines after gathering opinions from the market and industry.Stringent settlement risk management1) Tightening the margin ruleThe regulator will consider evaluating the settlement risk of a qualified institutional investor and determine the grade to impose margin requirements on the investor prior to trading when it fails to meet certain grade requirements.Currently, qualified institutional investors are allowed to deposit margins on a post facto basis.2) Setting a daily order limit for each qualified institutional investorThe regulator will consider setting a daily order limit for each qualified institutional investor based on total margin amount.Reform of trading system1) Implementing the random end rule for single price tradingIf the gap between the expected matching price at 14:50 (currently at 14:55) and the tentative market price (closing price) is 5% or more, the deadline for submitting quotations will be extended within 5 minutes to prevent sharp price movements.Industrialized countries such as Germany, the UK and France already introduced such a rule to mitigate steep fluctuations in matching prices.Sound derivative markets1) Setting derivative position limitsThe regulator will consider setting limits for the maximum positions that may be taken for derivatives including option contracts through a thorough analysis of global pr
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