How will the 'Free-bond' system affect the Korean external bond market?

More than 90% of domestic bonds have been traded on the external market, but there has been no formalized trading system they are usually dealing via private messengers or a home trading system (HTS). Buying and selling through messengers or HTS has the competitive advantage over the dealing via phone such as fast transaction time, however, there is a structural problem that is difficult to adapt to the needs of market for participants. For this reason, Korea’s Financial Services Commission announced the ‘Reformation of bond trading market’, which is mainly about the establishing of the specialized bond trading system, on last October.

Building the system

Korea Financial Investment Association (KOFIA) has been listening the needs of the market from a variety of experts to set up the ‘Free-bond’, which is specialized bond trading system. It had been developed for 5 months to implement BQS to external bond trading market and had simulated the system for 2 month (February and March) to improve the stability and friendliness to market of new developed system.

From 1^st of April, ‘Free-bond’ system has been officially operated and it consists of two main components: trading board and messenger.

User Perspective

The new formatted messenger and chatting room services are expected to provide users convenience in exchanging information about price and market circumstances of bonds. Also, the new system will increase the specialty in trading bonds by restricting users to only who works for bond trading in financial institutions. Moreover, the problem caused by private messengers such as errors and hacking believe to be solved and it will increase the security and stability of the system.

Market Perspective

‘Free-bond’ will make the pricing process more clearly, which will reduce the difference between the actual and intrinsic value of bonds. It is expected to reduce the transaction costs and it might increase the volume of bond trading. The increase in volume will support the market to be able to introduce variety of bonds related derivatives and this will offer the different kinds of investment opportunities to the investors.

Regulatory Perspective

The ‘Operations of Finance and Investment Institutions’ Act was reformed to control and operate ‘Free-bond’ system more effectively and efficiently. This will improve the completeness and competitiveness of bond market.

Expected Future Outcome

Currently, ‘Free-bond’ system is not linked to electronic transaction process, so KOFIA is planning to connect their new system to Korea Security Depository (KSD), which will allow people to make authorized transactions electronically. Introducing and settlement of the ‘Free-bond’ system will play an important role when Korea joins the World Government Bond Index (WGBI). It will increase the efficiency of bond transactions and the level of access to information. Also, it will strengthen the connection between Korean and developed countries’ bond markets, which is expected to attract the foreign investment to the bond market.