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2009.122009.12
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Current status Points at issue Basic framework
Introduce a comprehensive system Expand business scope Upgrade investor protection mechanism
I. Background for legislation
II. Major changes
III. Others
IV. Expected effects
FSSFSS
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I. Background for legislation Current status
Current status of capital market Corporate financing through capital market continues to shrink
Financing through equities
Capital market fails to grow commensurate with real economic growth
8778
6250 48
2001 2002 2003 2004 2005
1412
911
87
2000 2001 2002 2003 2004 2005
(Trillion won)(Trillion won)
53.9 54.0
52.3
52.451.6
52.2
1999 2000 2001 2002 2003 2004
(%, Financing balance)
8 7 .31 0 5 .3 1 0 6 .4
1 3 1 .81 4 5 .6
K o r e a J a p a n U . S U . K . T a iw a n
Equity market by country
(Market capitalization/GDP)
8 3 .5 8 71 0 6 .5
1 6 3 .2 1 8 9 .4
K o r e a G e r m a n y F r a n c e U . S J a p a n
Bond market by country
(Bond reserves/GDP)
Financing through corporate bonds
(%, 2005)(%, 2003)
Ratio of capital marketto financial market
Capital market & its related financial services are yet to be fuCapital market & its related financial services are yet to be fully developedlly developed
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Current status of capital market related financial services Lagging behind commercial banks in terms of restructuring, business size
and profitability
Substantially weak competitivenessSubstantially weak competitiveness in quality and quantity compared to the top 3international investment banks
* 1, 2, 3 and 4 are the 4 major domestic companies (net worth basis)* G: Goldman Sachs * Me: Merrill Lynch * Mo: Morgan Stanley
Restructuring by sector[Number of market players]
31 38
4433
1923
1999 2005
Commmercial
bank
Asset
management
company 0.40.4
1.54.0
1999 2005
Commercial
bank
Securities
company
5.57.1
14.5
5.4
12.8
19.6
2001 2005.1/2
Commercial
bank
Securities
company
Asset
m,anagement
comapny
Business size by sector[Average net worth]
Profitability by sector[Return on equity](%)
Brokerage-oriented business model
(Net revenue, 2004)
Small business size[Net worth]
Low profitability[Return on equity]
0 . 9 1 . 9
- 1 1 .7
4 . 6
1 9 .51 5 .0 1 6 .9
1 2 3 4 G M e M o
(%, 2004)
1 . 8 1 . 7 1 . 3 1 . 2
2 5 .13 1 .4
2 8 .2
1 2 3 4 G M e M o
Others Others
Principalinvestment
Principalinvestment I B
I B
Assetmanagement
Asset
management
Securitiesservices
Securitiesservices
(Trillion won, Mar 2005)
I. Background for legislation Current status
Securitiescompany
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SelfRegulationOriented
Insufficientinvestor
protection
Enhancement ofinvestor protection
by enactingstatutory laws
Regulationby statutory
laws
Insufficientinvestor
protection/market
autonomy
Enhancement of in-vestor protection/market autonomyby enlarging scope
of products andbusiness
Features ProblemPurpose/Approach
case
Jurisdictionswith common
law tradition `Jurisdictionswith statutorylaw tradition
EnglandFSMA2000Australia
FSRA2001
JapanKorea
Capital market & its related services consolidation is global trCapital market & its related services consolidation is global trendend
Started in England in 1987, but jurisdictions are different in termsof motive and approach
Some jurisdictions : to build internationally competitive capital market Others : to gain investors trust in capital market
Regime
I. Background for legislation Current status FSSFSS
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England
Purpose
Regain of market
credibility
Enhancement of
investor awareness
Reduction of
financial crime
Measures
Australia Japan
Same function samesupervision Principle
Investor protection
Mitigation of
concerns regarding
single mega authority
Strengthening of
investor protection
Shift from savings toinvestment
Globalization of
financial market
Financial innovation
Foreign acquisition
of domestic IB allowed
Establishment of
the FSA
Classification of
market and investor
- wholesale/retail- pro/amateur
Establishment of
APRA/ASIC
Strengthening of COB
Classification of
investor
- pro/amateurEnlarging the scopeof financial products
I. Background for legislation Current status FSSFSS
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I. Background for legislation Points at issue
Current capital market laws pose regulatory constraints to progress incapital market and related financial services(1)
Current capital market laws pose regulatory constraints to progrCurrent capital market laws pose regulatory constraints to progress iness incapital market and related financial services(1)capital market and related financial services(1)
As different laws are applied todifferent types of financial
institutions, the same financialfunctions are governed by different
regulations
As different laws are applied todifferent types of financial
institutions, the same financial
functions are governed by differentregulations
Causing regulatory arbitrage and loopholes ininvestor protection, as different regulations are
applied to financial activity of the sameeconomic nature
Causing regulatory arbitrage and loopholes ininvestor protection, as different regulations are
applied to financial activity of the sameeconomic nature
The law enumerates permissibletypes of securities and derivatives
for transaction
The law enumerates permissibletypes of securities and derivatives
for transaction
Restricting development and sales of diverseand creative financial investment products
Restricting development and sales of diverseand creative financial investment products
Concurrent engagement indifferent financial services related
to capital market, such assecurities and asset management,
is strictly restricted
Concurrent engagement indifferent financial services related
to capital market, such assecurities and asset management,
is strictly restricted
Serving as a barrier to raising competitivenessthrough synergy effect from integration,unlike in the case of investment banks
in advanced economies
Serving as a barrier to raising competitivenessthrough synergy effect from integration,unlike in the case of investment banks
in advanced economies
Advanced investor protectionsystem is not in place
Advanced investor protectionsystem is not in place
Undermining investor confidence in capitalmarket with sales of risky products
by deceiving, misleading or not fully disclosing
the extent of underlying risks
Undermining investor confidence in capitalmarket with sales of risky products
by deceiving, misleading or not fully disclosingthe extent of underlying risks
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Authorized service providers
may not do related businessbecause they are allowed to dealwith only conventional products
Unauthorized service providers
can freely engage in related business
1. Constraint in product design2. Insufficient capital flow into
innovative industries
1. Fraudulent sales practice2. Insufficient Investor protection
Innovative Products in Markets
Current capital market laws pose regulatory constraints to progress incapital market and related financial services(2)
Current capital market laws pose regulatory constraints to progrCurrent capital market laws pose regulatory constraints to progress iness incapital market and related financial services(2)capital market and related financial services(2)
I. Background for legislation Points at issue FSSFSS
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Categorizing financial investment services into six areas- Dealing, Arranging, CIS, Investment advisory with/without discretionary power, trust
Allow regulated financial products related business to authorized firms
Fortifying investor protection by introducing business conduct rules in the ActSuitability, Product guidance, Obligatory anti-conflicts of interests system
Enlarging the scope of regulated financial products (negative system)
- Eliminate existing regulatory grey zones
I. Background for legislation Basic framework FSSFSS
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I. Background for legislation Basic framework
Shift to functional regulationShift to functional regulation
Re-classify financial investment services,financial investment products and investors
according to their economic substance (nature)
* Financial function = Services + Products + Investors
Financial function of the same nature shall be governedby the same regulation, regardless of the financial
institutions engaged in the transaction
Introduce comprehensive systemIntroduce comprehensive system
Use a broad-based definition of financial investment productsto embrace them all into the new regime, so as to keep pace with
rapidly developing financial investment products
* Expand the scope of permissible products for financial investment
companies and the coverage of investor protection regulations
Expand business scopeExpand business scope
Allow integration of all financial investment services Dealing, arranging, asset management,
discretionary & non-discretionary investmentadvisory services, asset custodian management
Allow all incidental services Adopt an introducing-broker system Allow forex services in connection with financial
investment services
Upgrade investor protection mechanismUpgrade investor protection mechanism
Put in place advanced investor protection mechanism* Mandate product guidelines to investors
* Introduce the principle of suitability
Establish a system to prevent conflict of interests Expand the scope of securities subject to registration
statement/regulation, including indirect investment
securities and beneficiary certificates
Consolidate capital market laws
into a single law
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II. Major changes Introduce comprehensive system
Permissible securities and derivatives for transaction are enumerated by lawFICs may deal with financial investment products enumerated by law, and
only to which investor protection is applied
SecuritiesSecurities
21 items including government bonds, municipal bonds, specialbonds, corporate bonds, stocks, equity investment certificates,beneficiary certificates, MBS, ELW and ELS
OTCOTC
derivativesderivatives
Type: 4 items (forward, index forward, swap & option)
Underlying assets of securitized derivatives: securities,currencies, commodities & credit risk
Underlying assets: securities, currencies, commodities,credit risk
ExchangeExchange--tradedtraded
derivativesderivatives
(futures)(futures)
Type: futures, option Underlying assets: securities, currencies & commodities
1. Current status1. Current status
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II. Major changes Introduce comprehensive system
2. Framework Under the new Act2. Framework Under the new Act Introduce a broad-based definition to encompass all financial investmentproducts with investment value*
Allow FICs to structure and deal with all financial investment productsand apply regulations on investor protection to all of these products
All financial products
DepositsInsurancecontracts
Securities,Derivatives
New financialproducts
DepositsInsurancecontractsFinancial investment
products
Concept of financial investment product
Objective (profit acquisition, loss avoidance): the objectives of conventional financial products, and the objectives ofderivates or new financial products
Investment value* (a basis of differentiating financial products from conventional savings deposit or insurancecontracts): characteristics of securities and derivatives
Money transfer: characteristics of securities and derivatives Rights: rights under/by contract
All financial products
The right arising from money transferThe right arising from money transfer by contract at a certain point in time, in either
presentpresent oror futurefuture, with full undertaking of the burden ofburden of loss on the (investment) principalloss on the (investment) principal,
loss exceeding principalloss exceeding principal, or possible additional paymentspossible additional payments in due course of pursuing profitprofit
acquisition, loss avoidanceacquisition, loss avoidance
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II. Major changes Introduce comprehensive system
The possibility of loss on the principal differentiates financial investmentproducts from non-financial products, such as deposits
Financial product
Financialinvestment product
Non-financialinvestment product
Yes
NoPossibility of loss on principal
Securities
Derivatives
Yes
NoPossibility of lossexceeding principal
Exchange-tradedderivatives
OTC derivatives
Yes
NoTraded on the exchange house
The degree of underlying risks divides financial investment products into two:securities (general financial products) and derivatives (risky financial products)
Derivatives are subdivided into exchange-traded and OTC derivatives by tradingchannel
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II. Major changes Introduce comprehensive system
Introduce a broad-based definition for each of the 3 categories of financialinvestment products-securities, OTC derivatives & exchange-traded derivatives
Securities
OTC derivatives Introduce a broad-based definition for forward, swap, and option
Exchange-tradedderivatives
Derivatives traded in exchanges
Maximize the scope of underlying assets of securitized derivatives and derivatives
ELS, ELW, FX-linked securities,reverse FRN, etc.
Rights under contract for the purpose of gainingprofits or avoiding losses linked to fluctuationsof underlying asset prices
Securitized derivatives
Indirect investment securities,unregulated indirect investmentsecurities, stocks, contributionquota, etc.
- Investments made in a common public businesswith expectation of profits
-Compensations depend upon a 3rd partysefforts
Investment contract
KDR, GDR, ADRSecurities of issuers that have received thedeposit of equity securities
DepositoryReceipt (DR)
Trust beneficiary certificates,investment trust beneficiarycertificates, etc.
Representing beneficial interestsBeneficiarycertificate
Stocks, subscription right,subscription certificate,
contribution quota, etc.
Representing equity contribution shareEquity
securities
Government bond, municipalbond, corporate bond,commercial paper, etc.
Representing debt liabilityDebt
securities
Con-
ventional
securities
ExampleDefinitionType
Securities, Currencies,Commodities, and Credit risk
Current
Financial investment products, Currencies,
Commodities, Credit risk, and other natural,environmental and economic risks
After
FSSFSS
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II. Major changes Expand business scope
Currently, financial investment services are comprised of securities services,futures services, asset management, trust, and discretionary & non-discretionary investmentadvisory services. Their business territories are strictly separated.
Allow FICs to conduct businesses encompassing 6 financial investment services
(trading, arranging, asset management, discretionary & non-discretionary investmentadvisory services, asset custodian management)
Establish a Chinese Wall to prevent the conflict of interests caused by rendering multiple services
Securitiescom
Futurescom
Assetmngmcom
Nondiscretionaryinvestment
advisoryservices
Trustcom
Securitiesbrokerage
Principal investmentUnderwriting
Futuresbrokerage Asset management Asset management
Current: multipleservices restricted
FICs
Dealing Arranging
Assetmngm
Discretionary
invest-ment
advisory
services
Non-discre-tionaryinvest-ment
advisoryservices
Assetcusto-dian
mngm
Investment bankingPrincipal investment
Securities services (brokerage)Asset management
After: Chinese Wall to be established
Discre-tionaryinvest-ment
advisoryservices
1. Remove the boundaries among different financial investment se1. Remove the boundaries among different financial investment servicesrvices
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II. Major changes Expand business scope
2. Allow incidental services2. Allow incidental services
Shift to a system that permits, in principle, all incidental services* with someexceptions
* Non-financial services incidental to financial investment services
Current After
[In case of securities
company]
22 services includingsecurities evaluation,
M&A brokerage/arrangement/
agency services,consulting service oncorporate management andrestructuring, securitiessafeguarding, etc.
Servicesscope
Positive-list systemMethod
(Principle)
Allow all non-financial
incidental services
(Exceptions)Services that may have
negative effect on the
soundness of FICs or
investor protection
Services
scope
Comprehensive
(Negative) systemMethod
FSSFSS
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II. Major changes Expand business scope
3. Expand sales network through introducing3. Expand sales network through introducing--broker systembroker system
Apply introducing-broker system to offer various channels of accessto financial investment products to investors
Make investor protection mechanism Employ the same investment solicitation regulation applied to FICs in order to prevent sales
of risky products by deceiving, misleading or not fully explaining the extent of underlying risks
Currently consider requesting a relevant certificate to guarantee the introducing-brokersbasic qualifications such as securities investment consultant license
FICs to take responsibility for registering introducing-brokers with the FSCand supervising them
- FICs shall be liable for any losses of investors incurred by illegal activities of
introducing-brokers entrusted by them
Investors have to visit branchesin person to purchase financial
investment products, causing
inconvenience
Current
Apply introducing-broker systemto allow brokers to sell financialinvestment products entrusted by FICs
The broker will solicit investmentand connect investors with FICs
AfterAfter
FSSFSS
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II. Major changes Expand business scope
4. Expand the scope of asset management services4. Expand the scope of asset management services
Expand CIS vehicles to the extent permissible under the Korean Civil orCommercial Codes
[1] Expand vehicles for collective investment scheme (CIS)
Redefine CIS-managed assets in a comprehensive manner and thus expand thescope of CIS-managed assets that are currently enumerated for permission[2] Expand the scope of CIS-managed assets
- Investment trust, company limited
& limited partnership (private offering)
Current
- Investment trust, company limited& limited partnership (private offering)
- Limited liability company,
limited partnership (public offering),anonymous partnership,general partnership
After
Securities, futures, real estate, tangible
property, CP, insurance claims,
fishing & mining rights, etc.
Current
Assets with any form of investment value
such as intellectual property rights, etc.
After
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II. Major changes Expand business scope
Remove restrictions on the scope/type of assets to be managed by funds to enhanceautonomy of the asset management industry and satisfy diverse demands of investors
[3] Allow Funds with Mixed Asset
Specialassets
Tangibleassets
Realestate
Deriva-tives
Secu-
rities
Special
assetsfunds
Fund of
fundsMMF
Tangible
assetsfund
Real
Estatefund
Deriva-
tivesfund
Secu-
ritiesfund
Assets for investment determine thescope of each funds operation
Securities fund, derivatives fund,real estate fund, tangible asset fund,MMF, fund of funds, special asset fund
Funds are classified based on theinvestment assets
Current
Special
assets
Tangibleassets
Realestate
Deriva-tives
Secu-rities
MixedMixed
asset fundasset fundMMF
Special
assets
Real
estate
Secu-
rities
Classifi
-cation
Establish funds with mixed assetswhich can be operated freely withoutbeing limited to specific assets
Re-classify the current fund categoriesinto four based on investment assets,while lifting restrictions on theiroperation
After
FSSFSS
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II. Major changes Expand business scope
5. Expand the scope of FX services5. Expand the scope of FX services Allow FICs to offer authorized or registered services freely
both in domestic and foreign currencies
With regards to management of FICs own assets, all foreign currency transactions shall beallowed, if in full compliance with the procedures set forth in the Foreign ExchangeTransactions Act
These proposed changes will be reflected in relevant FX transaction regulations,along withlegislation of the Capital Market and Financial Investment Servilegislation of the Capital Market and Financial Investment Services Actces Act
Positive-list system Securities companies: funds exchange, foreign
securities trading, partial FX derivatives trading
Futures companies: funds exchange,hedge trade in FX forwards
Asset management companies: funds exchange,foreign securities trading, issuance & offeringof indirect investment securities
in foreign currency
Current
Allow capital transaction(hedging or investment purposes)
with regards to management ofFICs own assets, if in full
compliance with the procedures
Management
of FICs ownassets
money exchange Allow authorized FICs to
engage in foreign currency
transactions without
restriction
Financialinvestment
servicesrelated FXservices
Comprehensive systemAfter
FSSFSS
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II. Major changes Expand business scope
Enable FICs to provide, through their accounts, incidental services such assettlement, remittance and deposit & withdrawal on demand
Pave the legal grounds for FICs to join the small sum settlement network system of theKorea Financial Telecommunications & Clearings Institute through agency banks
Develop a wide selection of new financial products which will allow FICs to deposit,withdraw and remit without restriction, as in the case of advanced investment banks
AfterCurrent
Not allowedSettlement of credit card bills, giro payment, etc.
Available only during bankbusiness hours with extrafees
Money transfer to other banks
Available only during bankbusiness hours
Money withdrawal from other banks ATM/CD
Not allowedMoney transfer from other banks ATM/CD intosecurities accounts
Permit FICs to provide thesame incidental services
via the financial informationnetwork system
Available only during bankbusiness hours
with extra fees
Money transfer from other banks into securities
accounts
6. Establish the grounds for6. Establish the grounds for FICFICss incidental servicesincidental services
such as settlement and remittancesuch as settlement and remittance
FSSFSS
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II. Major changes Upgrade investor protection mechanism
En bloc application of regulations for investor protection in the Capital Market andFinancial Investment Services Act shall be made, covering all, including OTC
derivatives trading currently in absence of investor protection mechanism.
Eliminate loopholes in investor protection
SecuritiesTrading
ActUnregulated
CIS
AssetMgmtAct
DerivativesTrading
(OTC
trading,FX margintrading)
OtherFinancial
Investment Act
(Start-up,Real estate,
Ship investment,etc.)
Indicates the areas without investor protection mechanism
BankingAct
Capital Market and Financial Investment Services Act
FuturesTrading
Act
TrustBusiness
Act
Merchantbank Act
Insu-rance
Act
Small Loan &Credit
Finance
Act
Insu-ranceAct
Small Loan &Credit
FinanceAct
BankingAct
1. Remove loopholes in investor protection1. Remove loopholes in investor protection
Current legal system
New regime under the Act
FSSFSS
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II. Major changes Upgrade investor protection mechanism
Obligate FICs to provide investors with detailed explanation on thecontents and underlying risks of the products when soliciting investment
[1] Introduce the duty of product guidance in full scale
Expand special liability rule to all financial products under which FICs are held liablefor losses and damages incurred to investors from FICs incomplete product guidance
Under review is a plan to enhance investor protection by estimating the loss on principalas the amount of damage in case of any loss on principal
Estimated
amount of
loss/damage
Applied only to indirectinvestment securities
Special liabilityrule
Prospectus or verbalexplanation is provided
Method ofexplanation
Limited number of products
(i.e., indirect investmentsecurities, futures)
Applicable
products
Current
Applied to all financialinvestment products
Estimated
amount of
loss/damage
Applied to all financialinvestment products
Special liabilityrule
Potential investors
understanding shall beconfirmed after due product
guidance is given
Method ofexplanation
All financial investmentproducts
(with investment value)
Applicable
products
After
2. Introduce regulation on investment solicitation2. Introduce regulation on investment solicitation
-- Institutionalize investor protection mechanism in line with gloInstitutionalize investor protection mechanism in line with global standardsbal standards
FSSFSS
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II. Major changes Upgrade investor protection mechanism
The principle of suitability shall be introduced for investment solicitationtailored to investor profiles
[3] Adopt the principle of suitability: Applicable to non-professional investors
Prior to solicitation, grasp investor profiles such as wealth status, investmentpurpose, experience, etc., through interviews with potential investors
Applicable only to non-professional investors who are relatively weak in risk taking and hedging
Unsolicited calls via unwanted phone calls and other methods may infringeon privacy and peaceful life of potential investors
[4] Make a new regulation on unsolicited calls
Therefore, investment solicitation through real-time methodslike visiting and calling shall be permitted only at the investors invitation
[2] Introduce the know-your-customer rule
FSSFSS
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II. Major changes Upgrade investor protection mechanism
Categorize investors into professional and non-professional investors accordingto their risk taking and hedging capacities such as expertise and investment size
Professional Investor
- Financial institutions, large corporations (by number of employees, asset sizeand capital adequacy ratio), government agencies and international organizations
- Individuals who meet certain requirements, such as transaction experienceand financial asset size
Non-professional investor
- Other individuals and corporations that do not belong to the category ofprofessional investors
FSSFSS
3. Regulation will be different according to the type of investor3.3. RRegulation will be different according to the type of investor
FSS
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II. Major changes Upgrade investor protection mechanism
Individual regulations oneach financial investment service (examples)
appliedappliedDuty of good faith
appliedDuty of lawful product guidanceappliedSuitability principle
appliedappliedProhibition of unwanted solicitation
appliedappliedKnow-your-customer rule
Professional investorNon-professional investor
FSSFSS
Entry requirements for FICs are also different according to the type ofinvestor
* Less capital and smaller number of professional staff members are requiredfor the FICs doing business only with professional investors
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II. Major changes Upgrade investor protection mechanism
Definition of conflict of interests Act of pursuing the interests of FICs or other investors at the expense of the interest of
certain investors
- Conflict of interests takes place in carrying out even a single financial investment service.With multiple financial investment services allowed, conflict of interests between FICs willlikely increase.
Measures to prevent conflict of interests Prohibit conflict of interests by law and enforce it with sanctions Oblige FICs to set up an internal control system in order to monitor and manage conflict of
interests at all times
Make FICs disclose any conflict of interests to investors. FICs are not allowedto render related services until and unless such conflict is resolved
Make organizational separation and/or prohibition of employees holding more thanone position mandatory if serious conflict of interests is deemed to exist
4. Establish a system to prevent conflict of interests4. Establish a system to prevent conflict of interests
FSSFSS
III O h FSSFSS
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III. Others
1. Expand the scope of disclosure and registration requirements1. Expand the scope of disclosure and registration requirements
Apply the current disclosure and registration requirements (registration statement)to all securities that need investor protection
New Act confines exemption from registration obligation only to bonds issuedby government and quasi-government entities
Seek ways to lower expense ratio on securities issuance (stock at 1.8bp, bond at 5~9bpat present) in order to prevent a sharp rise in issuance cost from the expanded application
of disclosure and registration requirements.
* Bonds issued by corporations directly established by law(e.g., Korea Development Bank established by the Korea Development Bank Act)
Current Securities exempted from
registration requirements
Government bonds Municipal bonds Special bonds* Constructive specialty bonds Indirect investment securities Beneficiary certificates etc.
Proposed
Securities to be exempted fromregistration requirements
Government bonds Municipal bonds Special bonds*
FSSFSS
III Oth FSSFSS
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III. Others
The obligation of periodic disclosure of listed companies shall be withheld, when deemednecessary, in consideration of equilibrium between investor protection and business
secrets asas in the issuance registration and regular disclosure.
The 5% rule shall be reformed by abolishing the exemption of the central and municipalgovernments and government funds from reporting.
Regulations on prohibition of insider trading shall be strengthened by expanding theapplication scope to all financial investment products that may gain unfair profits by
usurping on inside information.
Regulations on prohibition of market price manipulation arising from the permittedcross-trading of securities and derivatives shall be completed, which will prevent any
unlawful linkage between spot trading and futures trading for the purpose of unfair and
illegitimate profit generation through price manipulation in either of the two markets.
FSSFSS
2. Reform disclosure requirements and unfair trading activities2. Reform disclosure requirements and unfair trading activities
III Oth FSSFSS
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III. Others
3. Reform self3. Reform self--regulatory systemregulatory system
Legislation of the Capital Market and Financial Investment Services Act willinevitably require review of the current institution-based self-regulatory system,including maintaining the code of business among members, adjusting business-
related disputes and managing the professional personnel system.
With the same financial investment services available across the board, the need for multipleregulatory organizations will be weakened.
Functional self-regulatory system is required with the introduction of functional regulatory regimes. A blueprint for effective self-regulatory system will be prepared in light of the purport of the newconsolidated act after fully taking into account the opinions from member companies
PRO
Dealing
Arranging
Asset management
Discretionary &non-discretionaryinvestment advisory
Asset custodianmanagement
SRO FICs
FSCFSS
KSDA
KOFA
AMAK
Securitiescompany
Futurescompany
Assetmanagement
company
PRO SRO FICs
FSCFSS
SelfRegulatory
Organization
* PRO: Public-regulatory organization * SRO: Self-regulatory organization
Current Proposed
FSSFSS
III Others FSSFSS
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III. Others
A sufficient grace period (1 year 6 months) is granted until the enforcement date afterproclamation of the new law in order to enable the supervisory authorities and market
participants to prepare well.
The supervisory authorities shall be required to reshuffle the current institutionalguideline into a function-based one.
Market participants shall be required to adjust the current equity capitaland modify the human and material resources in order to meet the new functionalrequirements for authorization and registration.
Proclamation date : August 3, 2007 Effective date for the reauthorization of current businesses : August 4, 2008 Overall effective date : February 4, 2009
4. Date of enforcement4. Date of enforcement
FSSFSS
IV Expected effects
FSSFSS
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IV. Expected effects
Business scope: The same business scope as that of advanced IBs will be realized[1] Set up a business model in line with advanced IBs
Principalinvestment
Corporatefinancing
Securitiesservices
Asset management
Securitiescom
Futurescom
AssetManagement
com
Non-discretionaryinvestment
Advisory com
DiscretionaryInvestment
advisory comTrust com
Dealing
FICs
Arranging Assetmanagement
Non-discretionaryinvestmentadvisory services
Discretionaryinvestmentadvisory services
Assetcustodianmanagement
Emergence of advanced investment banks (IBs) with global competitiveness
is expected through convergence and consolidation in the financial industry
Emergence of advanced investment banks (Emergence of advanced investment banks (IBsIBs) with global competitiveness) with global competitiveness
is expected through convergence and consolidation in the fis expected through convergence and consolidation in the financial industryinancial industry
Principalinvestment
Corporatefinancing
Securitiesservices Asset management
Advanced IBs
Current
After consolidation
FSSFSS
IV Expected effects
FSSFSS
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IV. Expected effects
Financial investment products
ex) Mixed assets funds that can changeinvestment vehicles freelyamong stocks, bonds, real estate,currencies, etc.
Establish funds notrestricted by the targetinvestment asset
ex) Publicly offered indirect investmentsecurities using joint stock companyunder the Commercial Law, anonymouspartnership typed funds, etc.
Structure collectiveinvestment scheme byusing various CIS vehicles
ex) Inverse floaterDual indexed notes (CMT, etc.)Range accrual notesCPPI based notesDigital option embedded notesCredit-linked notes
Fund-linked notesCAT bonds
Design securities thatadopt all kinds ofderivative techniques(Securitized derivatives)
Securities
ex) Derivatives whose underlying assets are
catastrophe, crime rate, weather such asprecipitation, snowfall, sunlight, etc.
Structure derivatives
based on diverserisks measurable
OTCderivatives
ex) Futures and options related to
environment and energy (carbon
emission credits, electric power)
Any derivatives can betraded on the exchange
house if properly structured
Exchange-traded
derivatives
FSSFSS
IV Expected effects FSSFSS
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IV. Expected effects
Competitiveness of the FICs will be raised on the back of their ability to structureand manage all financial investment products such as corporate financing, principal
investment and asset management, as and when deemed necessary.
[2] Strengthen competitiveness by structuring and offering a multitude of
new financial products
IBs Corporate Financing businessExpanded business scope allows IBs to support the structuring of and underwrite new
securities on top of the conventional stocks and bonds, boosting fundraising
capacity of corporations.
Asset Management businessIt will be possible to structure and offer a variety of custom-made securitized
derivatives, indirect investment products and derivatives.
FSSFSS
IV Expected effects FSSFSS
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IV. Expected effects
About 40% of 300 regulations concerning capital marketto be scrapped or mitigated
10
Newly establish 300
Current
Under reform
19010120
After reformEaseScrap
Major regulations to be scrapped are on the following: Prohibition of concurrent engagement in securities, futures and asset
management services
Restriction on financial investment products Restriction on types of vehicles for collective investment scheme
and classes of indirect investment securities
Restriction on management of proprietary assets owned by assetmanagement company, trust company and merchant bank
Obligatory registration with the Financial Supervisory Commissionby securities issuers
[3] Bring regulatory reform
FSSFSS
IV. Expected effects FSSFSS
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Increasing level ofinvestor protection
Increasing level ofIncreasing level of
investor protectioninvestor protectionEliminate loopholes in
investor protection
Eliminate loopholes inEliminate loopholes in
investor protectioninvestor protection
Advanced investor protection
- Product guidance, liability fordamage, suitability
- internal control system foranti-conflict of interest
Advanced investor protectionAdvanced investor protection
- Product guidance, liability fordamage, suitability
- internal control system foranti-conflict of interest
Functional Regulation
- Same supervision for samefunctions
Functional RegulationFunctional Regulation
- Same supervision for samefunctions
Comprehensive System
- Financial products
Comprehensive SystemComprehensive System
- Financial products
Strengthening unfair trading- enlarge the scope ofinsider and securites forinsider regulation
- spot(futures) inked futures(spot) market manipulation reg.
Strengthening unfair tradingStrengthening unfair trading-- enlarge the scope ofenlarge the scope ofinsider andinsider and securitessecurites forforinsider regulationinsider regulation
-- spot(futuresspot(futures) inked futures) inked futures(spot) market manipulation reg.(spot) market manipulation reg.
Procuring informed investment based on full and fair disclosureand effective renumeration
IV. Expected effects FSS
[4] Fortified investor protection will make more credible market
FSSFSS
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