Financial stability is a prerequisite to innovation and inclusive finance policies. FSC maintains close market monitoring for any signs of market volatility and works to ensure stability in the financial markets. There are risk factors originating from abroad and from within. FSC focuses on making our economy more resilient from external shocks, such as a disruption in the global supply chain, and supporting Korea’s material, component and equipment industries to help boost their global competitiveness. Internally, FSC is closely monitoring the trends in household debt and seeking reforms to corporate restructuring in order to prevent domestic risk factors from turning into systemic risks. Policies aimed at increasing financial stability also include enhancing fairness in the financial markets by introducing a comprehensive legal framework for the supervision of financial conglomerates, improving market discipline and promoting transparency in corporate disclosure and accounting practices.
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Nov 08, 2011
- FSC Lifts Temporary Ban on Short Selling of Non-Financial Stocks
- The FSC decided to lift a three-month ban (August 10 - November 9) on short selling of non-financial stocks from November 10, while maintaining the ban on financial stocks for a while.Stock market volatility has been considerably subdued since August when the financial market turmoil began to unfold.** KOSPI: 2,172 (Aug.1) →1,801 (Aug. 9, short-selling ban) →1,653 (Sept. 26) → 1,919(Nov.7)However, given that potential Eurozone risks still remain such as a possibility of Greek default, growing concerns about Italy’s debt crisis, and upcoming maturity dates of PIIGS sovereign debt,* the FSC decided to maintain the short-selling ban on financial stocks vulnerable to internal and external factors.* PIIGS sovereign debt to be matured (unit: $100 million): 1,843 (4Q2011), 2,832 (1Q2012), 1,769 (2Q2012)In August, Greece, Italy, France, Spain and Belgium also banned short sales; however, Greece is the only country that banned short selling of all listed stocks as we did. The remaining four countries imposed short-selling bans on a few number of financial stocks.*Please read the attached file for details.
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Jul 04, 2011
- Plans for the Soundness of Savings Banks' Management
- CURRENT CONDITIONS OF SAVINGS BANKS(Assets) As of end-March 2011, total assets of 98 mutual savings banks in operation were KRW74 trillion, down 2% from KRW75.5 trillion at the end of 2010.Mutual savings banks’ operations are still focused on extending real estate-related loans including PF loans, which accounts for 42.8%* of their total outstanding loans as of end-March 2011.(*cf. 44.7% at the end of 2010)(Deposits) As of end-March 2011, mutual savings banks received a total of KRW 64.4 trillion in deposits, down 2.8% from KRW66.3 trillion at the end of 2010.(Soundness) As of end-March 2011, the delinquency ratio of mutual savings banks rose to15.8%, up 1%p from 14.8% at the end of 2010, mainly due to rise in the delinquency ratio for real estate –related loans.*As of end-March 2011, the delinquency ratio for real estate loans rose to 20.4%, up 2.4%p from 18.0% at the end-December 2010.Despite incurred losses of savings banks, the BIS capital-adequacy ratio rose to 10.25%, up 0.42%p from 9.83% at the end of 2010, backed by continued efforts for recapitalization.* With losses of seven savings banks whose operations were suspended added, the BIS ratio combined would drop to around 7%. (as of end-March 2011, 7.57%, lower than 9.14% in June 2010)(Profitability) Due to the sluggish real estate market and growing competition in the retail financial sector, mutual savings banks recorded a total of KRW333.3 losses from July 2009 to June 2010; and KRW48.7 billion from July 2010 to March 2011.* From July 2010 to March 2011, 67 savings banks (68.4%) posted profits while 31savings banks (31.6%) incurred losses.PLANS TO ENHANCE THE SOUNDNESS OF SAVINGS BANKS’MANAGEMENT1. To help mutual savings banks’ “soft landing”- Additional purchase of non-performing PF loans from savings banks: As of June 20, the government purchased non-performing PF loans worth KRW1.9 trillion through the Restructuring Fund and singed an MOU with savings banks to help them normalize their oper
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Jun 29, 2011
- Comprehensive Measures on Household Debt
- PROGRESS BRIEFThe government has responded to household debt problems with a series of policy measures in order to enhance the soundness of household debt and financial institutions and at the same time to ensure low-income households’ access to loans.- The application of debt-to-income (DTI) limits for mortgage loans, which had been temporarily eased until last March, was reinstated starting April.- Measures to Encourage Sound Competition among Credit Card Companies (Feb. 9); Measures to Curb Credit Card Companies from Excessively Expanding Their Businesses (June 7)- Measures to Ensure Low-Income Households’ Access to Loans (April 15)DIAGNOSIS OF THE CURRENT HOUSEHOLD DEBT LEVELSAs of end-March 2011, Korea’s household debt reached KRW 801.4 trillion with an annual growth rate of 13% on average since the Asian financial crisis, exceeding the nominal GDP growth rate of 7.3% over the same period.The growth of household debt during the post-crisis period is attributed to the combination of various factors such as low interest rates, abundant liquidity, expectations about rise in real estate prices, and excessive lending by financial institutions.With all the conditions – the soundness of household debt, the proportions of loans extended to borrowers with good credit ratings, loss-absorbing capacity of financial institutions, and household asset holdings – taken into account, we see the current levels of household debt still “broadly manageable.”However, we cannot rule out a possibility that household debt problems would turn into threats to Korea’s economy and financial markets unless we take preemptive measures; therefore, the government came up with a package of measures to contain potential risks of household debt.FINANCIAL POLICY MEASURES ON HOUSEHOLD DEBT1. Measures to keep household debt growth at a manageable paceA. For the banking sector- Apply higher BIS risk weights to high-risk mortgage loans or excessive loans disproportionately concentrated
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Jun 08, 2011
- Progress Report on the Private Equity Funds Market in Korea
- BACKGROUNDPrivate Equity Funds (PEFs)* were introduced to Korea’s capital markets with the amendments to the Indirect Investment Asset Management Business Act (integrated into Financial Investment Services Capital Markets Act in 2007) on December 6, 2004 in order to promote corporate restructuring, MAs and to diversify investment instruments.* A private equity fund, structured as limited partnerships, typically makes investments in companies, funded with the capital raised from a few investors, and sells companies for high returns after value improvement.The domestic PEF market has gone through its introductory period from 2004 to 2007 and is now in its take-off stage. As of end-2010, there were 148 PEFs registered with a total of KRW 26.6 trillion in committed capital.*As of end-May 2011, the number of PEF firms rose to 167 with KRW28.9 trillion in investment commitments.REVIEW OF THE PAST SIX YEARS1. Fund raisingThe number of PEFs has been on the steady rise since its introduction in 2004 and reached 148 as of end-2010.In particular, for the past three years after the global financial crisis, the number of PEFs grew by 104, up 236% compared to end-2007, as more companies determined it to be the right time for investments.Their capital commitments and actual investments also increased to KRW26.6 trillion and KRW16.7 trillion at the end of 2010, up 197% and 234%, respectively, from 2007.- Capital Commitment: Investors’ obligation to provide a certain amount of capital to a PEF for investments at the time of fund formation- Actual Investment: The sum of investments into the target made through equity financing and debt financing- Capital Drawdown: The portion of capital committed to a fund that is drawn down over time2. InvestmentsPEFs expanded their investments from Korean manufacturing companies (212) to foreign companies, which totaled 25 as of end- 2010. They are also diversifying overseas investments*, shifting their focus away from the United States and ind
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Jun 07, 2011
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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 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
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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
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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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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
- 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 02, 2010
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Nov 22, 2010
- Countermeasures against KOSPI's Sudden Plunge on Nov. 11
- BackgroundThe KOSPI index plunged 48 points in the last ten minutes before the market closed on November 11, the options expiry date of the month, as foreign investors cleared their arbitrage positions by selling off KRW2.4 trillion worth of shares.Out of the sell-off worth KRW 2.4 trillion, it turned out that 97% of sell orders were made through a single trading desk. We, the FSC/FSS and Korea Exchange, are currently investigating whether the massive sell-off through the brokerage involved any alleged act of unfair trading.We are also probing into a local investment company, WiseAsset, who suffered huge losses from options trading on November 11, with particular focus on any illegality of the company’s asset management and its internal risk management system.Fluctuations in stock prices are inherent part of capital markets; however, severe volatility over a short period of time caused by a few market forces could leave individual investors unprotected and undermine investors’ credibility in Korean capital markets. In this respect, we plan to thoroughly investigate causes of the incident and come up with needed measures to make capital markets in Korea more stable.Upon a thorough investigation on whether there was any act of unfair trading involved and whether the financial investment company properly managed its investment risks, any violation of relevant laws and regulations will be dealt with strict sanctions to prevent a recurrence of a similar event.Measures to comeThe FSC/FSS will thoroughly review vulnerabilities of Korea’s capital markets as revealed on Nov. 11 and take prompt actions to bring immediately needed reforms to the current market system and practices. Depending on the results of the investigations, we will come up with follow-up measures for the longer term. A. Immediate actions1. Strengthening brokerage firms’ settlement risk managementBrokerage firms are exposed to the so-called settlement risk because they are the first to take respons
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Sep 02, 2010
- Stimulation Plan for Long-term KTB Futures Trade Approved by FSC
- To promote trading of long-term KTB futures, the KRX amended its Derivatives Market Business Regulation and the Financial Services Commission (FSC) approved the amended Regulation on September 1, 2010.As the follow-up of the plan for promoting long-term KTB futures that was devised jointly by the Financial Services Commission, Ministry of Strategy and Finance and KRX, the latest amendment streamlined the regulations related to KTB futures.The key amendments are 1) the harmonization of regulations governing KTB futures to ensure the balanced growth of short-term and long-term KTB futures, 2) stabilization of market operation and 3) reinforcement of market making function in the Derivatives Market.1. Harmonization of regulations governing individual KTB futuresBy minimizing the differences in the regulations applied to short-term and long-term KTB futures, it has been attempted to make easy the trade linking the short-term and long-term KTB futures contracts and enhance the accessibility of KTB futures.(1) To ensure the settlement expediency of 10-year KTB Futures, the plan is made to change the final settlement method from physical delivery to cash settlement. Accordingly, like the case of 3-year KTB Futures, the final settlement price of 10- year KTB Futures will be calculated on the basis of yield of basket bonds for final settlement and present value model for underlying bond and the final settlement day will be changed to T+1 day, i.e., the day after the last trading day, from the existing T+2 day. (2) By considering the recent market interest rate, the coupon rate of underlying bonds of 3-year and 5-year KTB Futures would be lowered to 5% per year from 8% per year in order to enhance the hedge effectiveness.(3) The plan is made to increase the trading unit of 10-year KTB Futures to KRW 100 million at par value from KRW 50 million at par value and lower the quotation unit to 0.01 from current 0.02. However, the tick value of KRW 10,000 will be kept unchanged.(4)
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Aug 02, 2010
- Plans to Enhance the Short-term Financing Market
- Current Status-quo of the Short-term Financing MarketBy short-term financing, we mean wholesale financing among financial institutions by trading or issuing under 1- year maturity products such as Calls, RPs, CPs, and CDs.An analysis of current situation by individual market sectors① (Call Market) Daily average volume of KRW 33 trillion*, which takes up about 50% of the short term financing market.* Reduced down to KRW 11 trillion level, but recently resumed to the pre-crisis level.(’08.9: KRW 29 trillion, ’09.3: KRW 11.5 trillion, ’09.12: KRW 30.2 trillion, ’10.6: KRW 33.1 trillion)② (RP) Trading volume (outstanding balance base) has been consistently growing.(’07: KRW 65 trillion, ’08: KRW 69 trillion, ’09: KRW 72 trillion). Most of the transactions (87%) are large client based.③ (CD) Dropped to KRW 79 trillion level due to the curb on Loan-to-Deposit Ratio regulation, while market trading volume has gone down to KRW 4.5 trillion daily average.Source: Bank of KoreaProblems Detected in the Short-Term Financing MarketThe overriding problem in the short-term financing market is that it is too much concentrated on the Call market which causes distortions to the market function and may entail latent systemic risk.- The convenience of Call transactions using credit based lending with high liquidity and low interest rate triggered the growing dependency of the Call market by financial institutions.- Composition of the short term financing market (as of May ’10): Call (50.5%), RP (16%), CP (17.2%), CD (16.4%) - The Call market’s function has been misled as ‘funding sources’ for the secondary financial institutions’ (e.g. securities houses and mutual savings banks) operating capital and in turn used to invest in high yielding short term KTBs.- In particular, excessive ‘call money’ by securities houses could become a source of potential systemic risk when hit by a sudden credit crunch.- The over-usage of the Call market also led to the unde
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Jul 27, 2010
- Stimulation Plan for Long-term KTB Futures Trade
- The Ministry of Strategy and Finance, Financial Services Commission and Korea Exchange (“KRX”) have jointly prepared the plan to stimulate trading of long-term Korea Treasury Bond (“KTB”) Futures.Recently, an opportunity to promote the trading of long-term KTBs has been presented as a result of growing issuance amount and trading volume of long-term KTBs. As the need to stimulate the 10-year KTB Futures trading volume grew, the task force made of representatives of research community, public sector and private sector was created in January 2010 to prepare the plan for promotion of long-term KTB Futures trade.The causes for poor trading of long-term KTB Futures may be examined in terms of cash market, market making and trading regulations.First, although the annual issuance amount of short-term and long-term KTBs is balanced , the trading condition in the secondary market is dominated by the short-term KTBs. For example, as of the end of June 2010, the outstanding amount of KTBs with maturity longer than 10-year is 46% of total outstanding amount of KTBs, but the trading volume of KTBs with maturity longer than 10-year is mere 13% of total trading volume of KTBs.Second, the market making for 10-year KTB Futures is rather inadequate and the primary dealers (“the PDs”) who account for over 53% of trading volume of 10-year KTBs do not actively participate in trading or market making of 10-year KTB Futures.Last, the physical delivery, which is the method used for final settlement of 10-year KTB Futures, acts as constraint in trading long-term KTB Futures. The investors are not familiar with the physical delivery settlement and as trading of long-term KTBs in the cash market is not brisk, the investors felt burdened in securing the deliverable KTBs for the final settlement by physical delivery.As the favorable condition has been created to stimulate the trading of long-term KTB Futures, it is expected that trading of long-term KTBs in the cash market would thr