Today, I would like to tell you about FSC’s press briefing on the issue of equity-linked securities (ELS) and derivatives-linked securities (DLS) markets which took place on 6th of September. For your information, it was the first briefing held by a newly-appointed Director-General of the Capital Market Bureau, Mr Kim Yong-beom.
Some of you may wonder why ELS/DLS related regulation should be improved. Well, the primary reason is to protect ELS/DLS investors. Since these securities are treated legally same as corporate bonds, the investors are highly exposed to the issuers’ credit risk. As these securities have gained a wide popularity since the global financial crisis, the necessity for investor protection has also increased.
So, what are the new ELS/DLS improvement measures? Two measures introduced at the press briefing were; 1) monitoring system for the issuance and operations of ELS/DLS, and 2) strengthened management of issuers’ credit risk.
Firstly, the new systematic monitoring system will be introduced to enhance issuance and operation of ELS/DLS. This will entail separation of management of hedged assets and client-owned assets, along with establishment of issuer-specific internal electronic system by securities houses for the purpose of managing such assets. Also, the FSC will review introduction of measures to protect investors’ assets, including legal separation of hedged assets and client-owned assets. Moreover, it will be required to report the condition of ELS/DLS issuance and operation to the Financial Supervisory Service (FSS) every month.
Secondly, the management of issuers’ credit risk will be improved. The measures will include linking (and thereby limiting) the issuance of ELS/DLS to a certain ratio of issuers’ equity capital. The rationale is to reduce imprudent issuance of short-term ELS/DLS which was driven by the private actors’ motive to increase market-share.
To sum it up, the improvement in ELS/DLS related measures means that the monitoring of ELS/DLS markets will be tightened and the creditor risks of these securities will be reduced. For this ends, FSC and the FSS will work together cooperatively. All these new measures are to be introduced by the fourth quarter of this year, and a research on measures for asset protection of ELS/DLS investors is currently underway and to be finished in October. To guard investors from excessive credit exposure in this volatile financial environment, these regulatory measures are, without question, necessary. However, I hope these measures to be effective, while not significantly undermining the market’s autonomy. What is your opinion? Look forward to hearing what you think!