Plan to improve vitality of securities firms

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Today’s topic is on FSC’s improvement plan of securities firms’ business vitality. The FSC has officially announced a plan to improve business vitality of stock firms. Interesting? Let’s find it out together!

Last year, financial authorities have reorganized general policies of the capital market. To name a few, constructing a promotion base of investment banks, adopting ATS and at the same time, allowing listed enterprises to finance through various channels more easily.

There are also a number of new policies they have adopted such as introducing crowd fund, KONEX and CCP. These policies also support President Park’s national project, known as the “creative economy”. But despite all these innovative policies and financial methods that have been adopted to improve capital market infrastructure, there are still some other things that need to be improved. Due to slower-than-expected economy restoration, deterioration of conditions and decrement of stock trading payments, world of securities business is indeed in a recession which is why the FSC, along with other financial authorities, have decided to propel new policies.

Then, let’s figure it out in a more details. First, let’s take a look at the general policy direction. The biggest reason why the FSC has decided to adopt this policy is to reduce functional gap between big and medium sized stock firms. In other words there is a “big gap” in risk management according to their capital strength, so there is a need to encourage big-sized stock firms to handle investment banks (IB) while small and medium sized firms develop specialized businesses. Easy to say, but how are they going to do this? First, in case of large stock firms, the FSC is going to aid innovative small companies to start their business and achieve growth by providing support with their foreign projects. To be a bit more specific, the FSC has decided to allow establish multiple affiliations in order to help them with M&As and restructuring problems. Moreover, the supporting plans also include reinforcing capabilities and mediating dealings of derivatives of stock firms too.

Now, let’s take a look at the main measurements which are to be carried out.
1. Restructuring through elastic authorizations
a. Permission of multiple establishment of stock firms
This policy is to develop competitive advantage in diverse expertise by allowing them to find spin-offs which can bring out elastic and flexible management of firms. In order to verify validity and profitability of specializing of these stock firms, so called “professional appraisal committee” will be evaluating every detail. The FSC is expecting to see an increase in M&As between stock firms with identical business model, strengthen competitive advantages of stock firms, and effectively restructure through business transfers through proving the firms with elastic authorizations. Some might say that this doesn’t look so practical, but this method has been already implemented in the United States and Japan which means this is quite predictable and trustworthy.

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b. Inducing abolition and inspection of dormant businesses
The FSC will thoroughly inspect management conditions of every single stock firms in order to pick out businesses with bad management performances. If these firms are to show no changes or improvements in 1 year, they are to be repealed or receive disadvantages. By adopting this provision, maintenance assets that are allocated in approved firms are to be declined which means that we can expect vitalization of specialized businesses making use of assets in more practical ways.

c. Strengthening adjustment capability of trading derivatives of stock firms.
There are thousands of business firms that import raw materials from abroad to engage in customized trading. That’s the reason why this provision is being welcomed by foreign traders. From now on stock firms will be able to sign a contract via “off-board transactions”. Such derivatives and options will include oil for vessels and aircrafts or hitting. The reason why the FSC has turned its eyes on foreign stock firms to aid domestic traders is because domestic stock firms are mainly focusing on derivatives, currency and interest rates, which are not very related to commodities mentioned above.

Domestic stock firms that handle “off-board transactions” have themselves well positioned but because of the policy that is limiting establishment of multiple affiliations, they are banned from mediating “off-board transactions”. But from now on, in order to strengthen competitiveness of stock firms and also to ensure stability of importing businesses, the FSC has decided to permit domestic stock firms to mediate “off-board transactions” but this is only of a limited recognition, as they are allowed to handle derivatives articulated with commodities only.

2. Improvement on business regulations
a. Abolition of limiting authorizations on OTC derivatives
Ever since global economic crisis erupted in 2009, in order to manage financial market risks, financial authorities have allowed OTC (Over the Counter) derivatives that are only based on stocks and price indices which is why a number of small and large stock firms weren’t able to handle OTC derivatives that are based on credit, products, currency or interest rates.

Since CCP (Central Counter Party) was first adopted this year, we have been expecting a shut out of system risks as all payments of derivate securities are fulfilled. At the same time, after designated screening ability of risk managements gets improved, stock firms will be able to handle derivatives with no limitations. There might be few problems that can arise, but the FSC has made itself clear that it will manage every risk with its new modified system.

b. Banning residual regulation of individual stock purchase payments.
In 2012 anticipation of excessive investments on theme stocks have been magnified. The Korean government has made a limit on credit line of individual stock purchase payments up to 5.1 trillion won as it was the residual standard as of Feb. 2012. But as stock exchange markets are to be considered as quite stable now, need of continuing an emergency measure doesn’t look so effective. So, from now on, regulating individual stock purchase payments are to be reverted back to normal (individual loans up to 40% of equity capital and in case of online-based firms, up to 70% of equity capital).

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c. Improvements on NCR (Net Capital Ratio)
Stock firms are to possess NCR, at least up to 150% of entire outbreak risks but there had been lots of protests constantly that this regulation has to be modified, their demand is that the pricing of debenture risks and shares should be modified as business environment of stock markets are changing. To fulfill this request, the FSC has officially announced that they would construct a task force along with the FSS (Financial Supervisory Service) and KOFIA (Korea Financial Investment Association) to bring out specific policies that will satisfy the stock firms demands among this year.

3. Curtailed commissions of stock interagency
The FSC along with the FSS (Financial Supervisory Service), KRX (Korea Exchange), KOSCOM, and KSFC (Korea Securities Finance Corporation) have agreed to support stock firms with costs of issuing and listing. Stock firms are expected to save approximately 10 billion dollars of commercial expenses.

As you can see, the FSC along with other financial authorities had put in a lot of efforts to vitalize stock markets. You might say the provisions that have been newly adopted, modified and abolished might not be so effective but these provisions have been through a thorough examination. I hope to see Korea’s stock markets grow a lot more.

Kwon hyokhee (kwonhyokhee@naver.com)

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