Revised Proposal of Capital Markets Act


Reasonably, the biggest issue rising as a hot potato in the Korean financial circles is legislating the revised plan of the Financial Investment Services and Capital Markets Act (also known as the Capital Markets Act). The Financial Services Commission had finally announced on the day of May 11, 2012 that it will re-legislate Capital Markets Act as soon as the 19th National Assembly will be held. FSC has made clear that the revised plan they are currently pursuing is not a fixed version from the one that they have submitted to the 18th National Assembly, as it will take time to revise the plan once again. This hurry signifies that legislating the revised version of Capital Markets Act is quite urgent. Once the proposal gets through the National Assembly, the act will be in operation within 3 months.

The revised plan is generally being composed of 4 distinctive areas. The main goal of this plan is to use currently operating financial regulations appropriately meaning to ban the needless and propel or add effective ones.

  1. Invigoration of Financial Investment Industry.

First part is on the invigoration of financial investment industry. After the global financial crisis Korea indeed, has been a bit careless on the domestic investments. But the revised plan, to make a vital financial investment environment, is focusing on domestic banks and financial companies by allowing them to launch new businesses and aligning the personal net worth. Also, the proposal is pursuing world-class asset management regulating system by reforming regulatory systems of public offering funds, trust businesses and rationalizing of hedge funds and private equity funds. In the case of PEF (Private Equity Funds), CBs (Convertible Bond) and BW (Bond with Warrant) will be allowed as a method of investments because of this revision, small and medium sized companies will be able to supply their funds without collaterals.

The key point of the first proposal is to promote and nurture Korean-styled investment banks. Market of asset management seems to be growing day by day. Korean banks are claiming to act as an IB, but their equity capital is 1/30 of prominent IBs like JP Morgan and Goldman Sachs for that, they failed in risk-taking and provided investors with financial instruments with no differentiation. So basically all they focus on currently is commission from investors by enticing them. Standing member of Securities of Futures Commission, Hong Yong Man has said that as the revised plan gets legislated, by June, 2013 we will be able to see approximately 5 investment banks.

A security company with equity capital of 3 trillion won will be qualified to act as an IB. The Diagram on the left shows current equity capital of top 10 security companies of Korea. It seems that as the revised plan of capital market act gets legislated, some of them will be able to act as an investment bank soon enough. The public sentiment’s attention is being amplified as it expects to see the “Korean Goldman Sachs”. An investment bank can practice M&A (Merger and Acquisitions) or make an enterprise loan directly and even trade stocks. FSC has announced that it will apply same loan rate of commercial banks (according on Basel standards) and also reduce NCR. NCR is commonly known as BIS ratio of security companies. The ratio is calculated by dividing liquid equitable capital with total risk values.


  1. Direct Investing and Internal Stability of General Meetings of Shareholders.

Second proposal is mainly compromised of two distinctive parts which are vitalizing direct investments of the enterprises and building up the internal stability of general meetings. Firstly, let us take a look at the direct investment part. To attract investments, diversification of financing is needed. The reason why FSC has admitted conditional capital and independent warrants is because there had been endless demands from the enterprises that they limited access on procuring capitals. The typical example of conditional capital is reverse convertible debenture. RCD is a bond that is being automatically transferred to a security when one had set specific grounds at the issuing time. For example, when a bank’s equity capital rate goes below against specific Basel regulating standards, the bond automatically is converted to a security. With conditional capitals, the company will be able to expanse capital and get ready for the critical situations. Next, the independent warrants. An independent warrant is a claim that can ask the quoted (public) company to issue new stocks with a price set beforehand. According to the Korean commercial law, currently only six types of corporate bonds are allowed but with these 2 bonds, corporations will be able to deliver funds a little bit easier and in a compact way. Also, Financial Commissions Service is considering implying crowd funding to the Capital Markets Act under their jurisdiction in the future. Crowd Funding, to simply put is a technique of gathering funds from the public (crowd). [1]It is also called social funding as it actively makes use of social networking services such as Facebook and Twitter. Usually crowd funding is used by artists or social activists by posting on their composition or social welfare projects but FSC is considering this technique to be used on initially starting companies to gather up funds in small sizes with investment contracts. Crowd Funding is a technique benchmarked from U.S’s JOBS law which is to support fledgling companies with funds.


The Second part is on the internal stability of shareholders’ general meetings. The thing we need to notice here is the shadow voting. Shadow voting is a policy that had been introduced in the year 1991 in Korea in order not to disband the general meetings as it might face lack of a quorum. It allows the stockholders to exercise their rights without actually attending at the general meetings but as there had been numerous drawbacks pointed out that this policy has been used as a quorum of small number of board of directors and majority shareholders to reinforce their management rights without encouraging minority shareholders to participate. So with the revised plan of the capital market act, from the year 2015, shadow voting will be legally banned. With this act, minority shareholders’ authorities will be strengthened and electronic voting system will be settled down.


  1. Reformation on Infrastructure of the Capital Market

The third part is mainly focusing on reforming the infrastructure of the capital markets. This proposal is to adopt ATS (Alternative Trading System) and Stock Exchange Market (Ex. KRX). To tell the truth, most of the (marketable) securities, derivatives and stocks are traded through HTS (Home Trading System). So why is the FSC trying to vitalize ATS AND SEM? First reason would be that current monopoly system of KRX’s international competitiveness looks infirm compared to the internationally renowned ones.

The biggest merit of the Stock Exchange Market is that is has the power to surveillance of the market. Insider trading and stock-in-trade manipulation would be the most widely known unfair trade practices. Unlike the Stock Exchange Market, the ATS is a small exchange market without the capacities of market surveillance and stocks’ listing. In other words, ATS is focused on sales only. Since it only focuses on the trading (sales), it can reduce the costs (commissions), improvements in services and has the merit of high speed. This revised plan of the act is proposing that the ones that have minimum value of five hundred million won of personal net worth and each stockholder should hold at least 15% of the shares (with the permission of FSC, 30% possible), will be permitted to establish ATS. Also, if the scale of ATS grows up, and certain billing is set, then changing over to a Stock Exchange Market is possible. But because the scale of Korean financial market is too s
mall compared to the foreign ones, dividing the market into ATS and SEM will be dangerous as dispersion will happen. FSC’s stance is that they will carefully observe the situation. Lastly, the adoption of CCP catches the sight. CCP (Central Counter Party) is a service for the products being traded in the face-to-face market in order to settle based up on an open account but with the revised plan of the act, CCP will be provided also to the derivative products being traded in over-the-counter markets. So in short, the transactions made in OTC will be handed over to CCP to be provided with settling service. At the Pittsburg G20 Summit in 2009, it has been agreed that all standardized over the counter derivatives should be traded through stock exchange market or electronic trading platform and lastly, liquidated through CCPs, until the year of 2012. This is another reason why adopting these policies mentioned above has been a bit accelerated.

  1. Alleviation of Regulatory Effectiveness on the Protection of Investors

Last part is on the alleviation of the regulatory effectiveness on the investors’ protection. In short, it focuses on advancing the system of regulating the unfair trades. According to this proposal; manipulation of market price using the over-the-counter market derivatives and disturbing the market orders will be strictly prohibited. Also, penalties and monetary restrictions will be introduced. Lastly, to protect innocent investors, there will be reasonable improvements on policies of buyout and public announcements. In scope, FSC is pushing ahead policies like normalizing the IPO (Initial Public Offering) market as scale of IPO or revising the policy of petty public offerings.

The Capital Markets Act indeed also has pros and cons but by looking at the current situation of Korean financial industries. By borrowing sayings from the actual participants in the industries and looking at the problems currently being occurred, it seems that Capital Markets Act is a must needed law for the financial market. As seen from above, the revised version contains many fixations and newly pursued policies that could cover up currently ongoing problems. Yes, possibly, other unsuspected conflicts can be occurred, but FSC, together with FSS is constructing a system that gives real-time alerts which will eventually lead to prompt measures. The revised proposal will be appraised as soon as the 19th National Assembly to be in session. I sincerely hope that the revised plan could offset the issues raised by the current Capital Markets Act, and also see the Korean financial companies to advance as world’s renowned ones. As soon as the revised proposal of Capital Markets Act gets legislated and take effect in 3 months, the related institutions, government and we too will have to monitor with close approach to see future prospects.



One thought on “Revised Proposal of Capital Markets Act

  1. Jon Y.

    Thank you for your thorough insight in regards to the expected enhancements to the capital markets law. Do you know if CCP guidelines for OTC derivatives will include only certain asset classes like interest rates, FX etc? Or will they attempt to cover all OTC traded products?

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