2009.

12
 FSS

I. Background for legislation

■ Current status
■ Points at issue
■ Basic framework
II. Major changes
■ Introduce a comprehensive system
■ Expand business scope
■ Upgrade investor protection mechanism

III. Others

IV. Expected effects

I. Background for legislation – Current status FSS

Capital market & its related financial services are yet to be fully developed

■ Current status of capital market

▶ Corporate financing through capital market continues to shrink

Financing through corporate bonds Ratio of capital market

Financing through equities to financial market
14 (Trillion won) 87 (Trillion won) (%, Financing balance)
12 78
11 62 53.9 54.0
9 50 52.4
8 48
7 51.6
52.3 52.2

2000 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 1999 2000 2001 2002 2003 2004

▶ Capital market fails to grow commensurate with real economic growth

Equity market by country Bond market by country
(%, 2005) (Market capitalization/GDP) (%, 2003) (Bond reserves/GDP) 1 8 9 .4
1 4 5 .6 1 6 3 .2
1 3 1 .8
1 0 5 .3 1 0 6 .4
8 7 .3 1 0 6 .5
8 3 .5 87

K o re a Ja p a n U .S U .K . T a iw a n K o re a G e rm a n y F ra n c e U .S Ja p a n
I. Background for legislation – Current status FSS

■ Current status of capital market related financial services

▶ Lagging behind commercial banks in terms of restructuring, business size
and profitability

Restructuring by sector Business size by sector Profitability by sector

[Number of market players] [Average net worth] (%) [Return on equity] Commercial
Securities 19.6 bank
Commercial 14.5
44 company
4.0 bank Securities
33 Asset 12.8
management
1.5 company
31 38 7.1
company
0.4 Securities 5.5 Asset
23 19 Commmercial 0.4 5.4 m,anagement
company
bank comapny

1999 2005 1999 2005 2001 2005.1/2

▶ Substantially weak competitiveness in quality and quantity compared to the top 3

international investment banks
Brokerage-oriented business model Small business size Low profitability
(Net revenue, 2004) [Net worth] [Return on equity] (%, 2004)
<4 major domestic <3 global IBs> (Trillion won, Mar 2005)
securities companies> 3 1 .4
IB 2 8 .2 1 9 .5
Others Others 2 5 .1 1 5 .0 1 6 .9
Principal
Asset investment IB 4 .6
management Principal 0 .9 1 .9
Asset investment
1 .8 1 .7 1 .3 1 .2
management
Securities 1 2 3 4 G Me Mo
Securities
services 1 2 3 4 G Me Mo - 1 1 .7
services

* 1, 2, 3 and 4 are the 4 major domestic companies (net worth basis)

* G: Goldman Sachs * Me: Merrill Lynch * Mo: Morgan Stanley
I. Background for legislation – Current status FSS

Capital market & its related services consolidation is global trend

■ Started in England in 1987, but jurisdictions are different in terms

of motive and approach
▶ Some jurisdictions : to build internationally competitive capital market
▶ Others : to gain investors’ trust in capital market

Purpose/
Regime Features Problem case
Approach

Enhancement of England
Jurisdictions Self Insufficient investor protection FSMA2000
with common Regulation investor by enacting Australia
law tradition ` Oriented protection statutory laws FSRA2001

Insufficient Enhancement of in-

Jurisdictions investor vestor protection
Regulation /market autonomy Japan
with statutory by statutory protection/ by enlarging scope Korea
laws market of products and
law tradition autonomy business
I. Background for legislation – Current status FSS

England Australia Japan

P Regain of market
Same function same
Strengthening of
u credibility supervision Principle investor protection
r Shift from savings to
Enhancement of Investor protection
investment
p investor awareness Mitigation of Globalization of
o Reduction of
concerns regarding financial market
s financial crime
single mega authority
Financial innovation
e
M Classification of
e Foreign acquisition market and investor Classification of
a of domestic IB allowed - wholesale/retail investor
s - pro/amateur - pro/amateur
u Establishment of Establishment of Enlarging the scope
r the FSA APRA/ASIC of financial products
e
s Strengthening of COB
I. Background for legislation – Points at issue FSS

Current
Currentcapital
capitalmarket
marketlaws
lawspose
poseregulatory
regulatoryconstraints
constraintsto
toprogr ess in
progress in
capital
capitalmarket
marketand
andrelated
relatedfinancial
financialservices(1)
services(1)
AsAsdifferent
differentlaws
lawsare
areapplied
appliedtoto Causing
different types of financial Causingregulatory
regulatoryarbitrage
arbitrageand
andloopholes
loopholesinin
different types of financial investor
institutions, investorprotection,
protection,asasdifferent
differentregulations
regulationsare
are
institutions,the
thesame
samefinancial
financial applied to financial activity of the same
functions
functions are governed bydifferent
are governed by different
applied to financial activity of the same
regulations economic
economicnature
nature
regulations

The
Thelaw
lawenumerates
enumeratespermissible
permissible Restricting
types Restrictingdevelopment
developmentandandsales
salesof
ofdiverse
diverse
types of securities andderivatives
of securities and derivatives and creative financial investment products
for transaction and creative financial investment products
for transaction

Concurrent
Concurrentengagement
engagementinin Serving
different Servingas
asaabarrier
barrierto
toraising
raisingcompetitiveness
competitiveness
differentfinancial
financialservices
servicesrelated
related through
through synergy effect fromintegration,
synergy effect from integration,
to capital market, such as unlike
to capital market, such as
securities unlike in the case of investmentbanks
in the case of investment banks
securitiesand andasset
assetmanagement,
management, ininadvanced economies
isisstrictly restricted advanced economies
strictly restricted

Undermining
Undermininginvestor
investorconfidence
confidenceinincapital
capital
Advanced
Advancedinvestor
investorprotection
protection market with sales of risky products
system market with sales of risky products
system is not inplace
is not in place by
by deceiving,misleading
deceiving, misleadingor ornot
notfully
fullydisclosing
disclosing
the extent of underlying risks
the extent of underlying risks
I. Background for legislation – Points at issue FSS

Current
Currentcapital
capitalmarket
marketlaws
lawspose
poseregulatory
regulatoryconstraints
constraintsto
toprogr ess in
progress in
capital
capitalmarket
marketand
andrelated
relatedfinancial
financialservices(2)
services(2)

Innovative Products in Markets

Authorized service providers Unauthorized service providers

may not do related business

because they are allowed to deal can freely engage in related business
with only conventional products

1. Constraint in product design

1. Fraudulent sales practice
2. Insufficient capital flow into
2. Insufficient Investor protection
innovative industries
I. Background for legislation – Basic framework FSS

Enlarging the scope of regulated financial products (negative system)

- Eliminate existing regulatory grey zones

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 Act

Suitability, Product guidance, Obligatory anti-conflicts of interests system
I. Background for legislation – Basic framework
Shift 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 governed
by the same regulation, regardless of the financial
institutions engaged in the transaction
Consolidate capital market laws
into a single law
Expand business scope
○ Allow integration of all financial investment services
→ Dealing, arranging, asset management,
discretionary & non-discretionary investment
advisory services, asset custodian management
○ Allow all incidental services
○ Adopt an introducing-broker system
○ Allow forex services in connection with financial
investment services
FSS
Introduce comprehensive system
○ Use a broad-based definition of “financial investment products”
to 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
Upgrade 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
II. Major changes – Introduce comprehensive system FSS

1. Current status

■ Permissible securities and derivatives for transaction are enumerated by law

FICs may deal with financial investment products enumerated by law, and
only to which investor protection is applied

▶ 21 items including government bonds, municipal bonds, special

bonds, corporate bonds, stocks, equity investment certificates,
Securities beneficiary certificates, MBS, ELW and ELS
▶ Underlying assets of securitized derivatives: securities,
currencies, commodities & credit risk

OTC ▶ Type: 4 items (forward, index forward, swap & option)

derivatives ▶ Underlying assets: securities, currencies, commodities,
credit risk

Exchange-
Exchange-traded ▶ Type: futures, option
derivatives
(futures) ▶ Underlying assets: securities, currencies & commodities
II. Major changes – Introduce comprehensive system FSS

2. Framework Under the new Act

■ Introduce a broad-based definition to encompass all financial investment
products with investment value*
Allow FICs to structure and deal with all financial investment products
and apply regulations on investor protection to all of these products
All financial products All financial products
New financial
products
Securities, Insurance Insurance
Deposits Deposits Financial investment
Derivatives contracts contracts
products

■ Concept of ‘financial investment product’

“ The right arising from money transfer by contract at a certain point in time, in either
future with full undertaking of the burden of loss on the (investment) principal,
present or future, principal
principal or possible additional payments in due course of pursuing profit
loss exceeding principal,
acquisition, loss avoidance”
avoidance

▶ Objective (profit acquisition, loss avoidance): the objectives of conventional financial products, and the objectives of
derivates or new financial products
▶ Investment value* (a basis of differentiating financial products from conventional savings deposit or insurance
contracts): characteristics of securities and derivatives
▶ Money transfer: characteristics of securities and derivatives
▶ Rights: rights under/by contract
II. Major changes – Introduce comprehensive system FSS

■ The possibility of loss on the principal differentiates financial investment

products from non-financial products, such as deposits

■ 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 trading

channel

Securities
No Exchange-traded
Financial Possibility of loss
investment product exceeding principal derivatives
Yes
Yes Yes
Financial product Traded on the exchange house
Possibility of loss on principal Derivatives
No No
Non-financial OTC derivatives
investment product
II. Major changes – Introduce comprehensive system FSS

■ Introduce a broad-based definition for each of the 3 categories of financial

investment products-securities, OTC derivatives & exchange-traded derivatives
Type Definition Example
Debt Government bond, municipal
Representing debt liability bond, corporate bond,
securities commercial paper, etc.
Equity Stocks, subscription right,
Con- Representing equity contribution share subscription certificate,
securities contribution quota, etc.
ventional
Beneficiary Trust beneficiary certificates,
securities certificate
Representing beneficial interests investment trust beneficiary
certificates, etc.
Securities Depository Securities of issuers that have received the
KDR, GDR, ADR
Receipt (DR) deposit of equity securities
- Investments made in a common public business Indirect investment securities,
with expectation of profits unregulated indirect investment
Investment contract securities, stocks, contribution
-Compensations depend upon a 3rd party’s
efforts quota, etc.
Rights under contract for the purpose of gaining ELS, ELW, FX-linked securities,
Securitized derivatives profits or avoiding losses linked to fluctuations reverse FRN, etc.
of underlying asset prices

OTC derivatives Introduce a broad-based definition for forward, swap, and option

Exchange-traded Derivatives traded in exchanges

derivatives

■ Maximize the scope of underlying assets of securitized derivatives and derivatives

Current After
Financial investment products, Currencies,
Securities, Currencies,
Commodities, Credit risk, and other natural,
Commodities, and Credit risk environmental and economic risks
II. Major changes – Expand business scope FSS

1. Remove the boundaries among different financial investment services

■ Currently, financial investment services are comprised of securities services,

futures services, asset management, trust, and discretionary & non-discretionary investment
advisory services. Their business territories are strictly separated.

Allow FICs to conduct businesses encompassing 6 financial investment services

(trading, arranging, asset management, discretionary & non-discretionary investment
advisory services, asset custodian management)

■ Establish a Chinese Wall to prevent the conflict of interests caused by rendering multiple services
Current: multiple
services restricted After: Chinese Wall to be established

Discre- Non FICs

Asset
Securities Futures tionary discretionary Trust
mngm Asset
com com invest- investment com Dealing Arran Asset Discretio Non-
custo-
com nary discre-
ment advisory ging mngm dian
advisory services invest- tionary mngm
services ment invest-
advisory ment
services advisory
services

Futures
Securities brokerage Asset management Asset management Investment banking
brokerage
Principal investment
Principal investment Securities services (brokerage)
Underwriting Asset management
II. Major changes – Expand business scope FSS

2. Allow incidental services

■ Shift to a system that permits, in principle, all incidental services* with some
exceptions
* Non-financial services incidental to financial investment services

Current After

Method Positive-list system Method

Comprehensive
(Negative) system
[In case of securities
company] (Principle)
Allow all non-financial
22 services including
securities evaluation, incidental services
Services M&A brokerage/arrangement/
scope agency services, Services
(Exceptions)
scope
consulting service on Services that may have
corporate management and negative effect on the
restructuring, securities soundness of FICs or
safeguarding, etc. investor protection
II. Major changes – Expand business scope FSS

3. Expand sales network through introducing-broker system

■ Apply introducing-broker system to offer various channels of access

to financial investment products to investors

Current
■ Investors have to visit branches
in person to purchase financial
investment products, causing
inconvenience
After
■ Apply introducing-broker system
to allow brokers to sell financial
investment products entrusted by FICs
▶ The broker will solicit investment
and connect investors with FICs

■ 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-broker’s
basic qualifications such as securities investment consultant license
▶ FICs to take responsibility for registering introducing-brokers with the FSC
and supervising them
- FICs shall be liable for any losses of investors incurred by illegal activities of
introducing-brokers entrusted by them
II. Major changes – Expand business scope FSS

4. Expand the scope of asset management services

[1] Expand vehicles for collective investment scheme (CIS)

■ Expand CIS vehicles to the extent permissible under the Korean Civil or
Commercial Codes

Current
- Investment trust, company limited
& limited partnership (private offering)
After
- Investment trust, company limited
& limited partnership (private offering)
- Limited liability company,
limited partnership (public offering),
anonymous partnership,
general partnership

[2] Expand the scope of CIS-managed assets

■ Redefine CIS-managed assets in a comprehensive manner and thus expand the
scope of CIS-managed assets that are currently enumerated for permission

Current
Securities, futures, real estate, tangible
property, CP, insurance claims,
fishing & mining rights, etc.
After
Assets with any form of investment value
such as intellectual property rights, etc.
II. Major changes – Expand business scope FSS

[3] Allow “Funds with Mixed Asset ”

■ Remove restrictions on the scope/type of assets to be managed by funds to enhance
autonomy of the asset management industry and satisfy diverse demands of investors

Current
■ Funds are classified based on the
investment assets
▶ Securities fund, derivatives fund,
real estate fund, tangible asset fund,
MMF, fund of funds, special asset fund
■ Assets for investment determine the
scope of each fund’s operation
After
■ Re-classify the current fund categories
into four based on investment assets,
while lifting restrictions on their
operation
■ Establish “funds with mixed assets”
which can be operated freely without
being limited to specific assets

Secu- Deriva- Real Tangible Special Classifi Secu- Real Special Mixed
Fund of MMF
rities tives Estate assets MMF assets -cation rities estate assets asset fund
funds
fund fund fund fund funds
Secu-
Secu- rities ○ ○ ○ ○ ○
rities ○ ○ ○ ○ ○ ○ ○
Deriva-
Deriva- tives ○ ○ ○ × ○
tives ○ ○ ○ ○ × ○ ○
Real
Real estate
○ ○ ○ × ○
estate
× × ○ × × × ×
Tangible
Tangible assets
○ ○ ○ × ○
assets
× × × ○ × × ×
Special
Special ○ ○ ○ × ○
assets
× × × × × × ○ assets
II. Major changes – Expand business scope FSS

5. 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 be
allowed, if in full compliance with the procedures set forth in the Foreign Exchange
Transactions Act

Current After
■ Comprehensive system
■ Positive-list system
Financial ▶ money exchange
▶ Securities companies: funds exchange, foreign
investment ▶ Allow authorized FICs to
securities trading, partial FX derivatives trading services engage in foreign currency
▶ Futures companies: funds exchange, related FX transactions without
services restriction
hedge trade in FX forwards
▶ Allow capital transaction
▶ Asset management companies: funds exchange, Management (hedging or investment purposes)
foreign securities trading, issuance & offering of FICs’ own with regards to management of
assets FICs’ own assets, if in full
of indirect investment securities compliance with the procedures
in foreign currency

※ These proposed changes will be reflected in relevant FX transaction regulations,

along with legislation of the Capital Market and Financial Investment Services Act
II. Major changes – Expand business scope FSS

6. Establish the grounds for FIC’s incidental services

such as settlement and remittance
■ Enable FICs to provide, through their accounts, incidental services such as
settlement, remittance and deposit & withdrawal on demand
▶ Pave the legal grounds for FICs to join the small sum settlement network system of the
Korea Financial Telecommunications & Clearings Institute through agency banks

Current After
Permit FICs to provide the
Available only during bank
Money transfer from other banks into securities same incidental services
business hours
accounts via the financial information
with extra fees
network system
Money transfer from other banks’ ATM/CD into
Not allowed 〃
securities accounts
Available only during bank
Money withdrawal from other banks’ ATM/CD 〃
business hours
Available only during bank
Money transfer to other banks business hours with extra 〃
fees

Settlement of credit card bills, giro payment, etc. Not allowed 〃

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
II. Major changes – Upgrade investor protection mechanism FSS

1. Remove loopholes in investor protection

■ En bloc application of regulations for investor protection in the ‘Capital Market and
Financial Investment Services Act’ shall be made, covering all, including OTC
derivatives trading currently in absence of investor protection mechanism.
Eliminate loopholes in investor protection
Current legal system

Securities Trust Other

Trading Derivatives Business
Asset Financial Small Loan &
Unregulated Trading Act Insu-
Banking Act Mgmt Investment Act Credit
CIS (OTC rance
Act Act trading, (Start-up, Finance
Act
Futures FX margin Merchant Real estate, Act
Trading trading) bank Act Ship investment,
Act etc.)

Indicates the areas without investor protection mechanism

New regime under the Act

Insu- Small Loan &

Banking 『 Capital Market and Financial Investment Services Act』 rance Credit
Act Act Finance
Act
II. Major changes – Upgrade investor protection mechanism FSS

2. Introduce regulation on investment solicitation

- Institutionalize investor protection mechanism in line with global standards

[1] Introduce the duty of product guidance in full scale

■ Obligate FICs to provide investors with detailed explanation on the
contents and underlying risks of the products when soliciting investment

■ Expand special liability rule to all financial products under which FICs are held liable
for 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 principal
as the amount of damage in case of any loss on principal

Current After
Limited number of products All financial investment
Applicable Applicable
products
(i.e., indirect investment products
products (with investment value)
securities, futures)
Potential investors’
Method of Prospectus or verbal Method of understanding shall be
explanation explanation is provided explanation confirmed after due product
guidance is given
Special liability Applied only to indirect Special liability Applied to all financial
rule investment securities rule investment products
Estimated Estimated
Applied to all financial
amount of × amount of investment products
loss/damage loss/damage
II. Major changes – Upgrade investor protection mechanism FSS

[2] Introduce the know-your-customer rule

■ Prior to solicitation, grasp investor profiles such as wealth status, investment
purpose, experience, etc., through interviews with potential investors

[3] Adopt the principle of suitability: Applicable to non-professional investors

■ The principle of suitability shall be introduced for investment solicitation

tailored to investor profiles
※ Applicable only to non-professional investors who are relatively weak in risk taking and hedging

[4] Make a new regulation on unsolicited calls

■ Unsolicited calls via unwanted phone calls and other methods may infringe
on privacy and peaceful life of potential investors
▶ Therefore, investment solicitation through real-time methods
like visiting and calling shall be permitted only at the investor’s invitation
II. Major changes – Upgrade investor protection mechanism FSS

3.
3.RRegulation
egulation will
willbe
bedifferent
differentaccording
accordingto
tothe
thetype
typeof
ofinvestor
investor

■ Categorize investors into professional and non-professional investors according

to their risk taking and hedging capacities such as expertise and investment size

Professional Investor

- Financial institutions, large corporations (by number of employees, asset size

and capital adequacy ratio), government agencies and international organizations
- Individuals who meet certain requirements, such as transaction experience
and financial asset size

Non-professional investor

- Other individuals and corporations that do not belong to the category of

professional investors
II. Major changes – Upgrade investor protection mechanism FSS

Non-professional investor Professional investor

Individual regulations on
each financial investment service (examples)
Duty of good faith applied applied

Know-your-customer rule applied applied

Prohibition of unwanted solicitation applied applied

Suitability principle applied ×

Duty of lawful product guidance applied ×

■ Entry requirements for FICs are also different according to the type of
investor

* Less capital and smaller number of professional staff members are required
for the FICs doing business only with professional investors
II. Major changes – Upgrade investor protection mechanism FSS

4. Establish a system to prevent conflict of interests

■ 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 will
likely increase.

■ Measures to prevent conflict of interests

① Prohibit conflict of interests by law and enforce it with sanctions

② Oblige FICs to set up an internal control system in order to monitor and manage conflict of
interests at all times

③ Make FICs disclose any conflict of interests to investors. FICs are not allowed
to render related services until and unless such conflict is resolved

④ Make organizational separation and/or prohibition of employees holding more than

one position mandatory if serious conflict of interests is deemed to exist
III. Others FSS

1. 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 issued
by government and quasi-government entities
Current Proposed
■ Securities exempted from
registration requirements ■ Securities to be exempted from
registration requirements
▶ Government bonds
▶ Municipal bonds ▶ Government bonds
▶ Special bonds* ▶ Municipal bonds
▶ Constructive specialty bonds ▶ Special bonds*
▶ Indirect investment securities
▶ Beneficiary certificates etc.

* Bonds issued by corporations directly established by law

(e.g., Korea Development Bank established by the Korea Development Bank Act)

■ Seek ways to lower expense ratio on securities issuance (stock at 1.8bp, bond at 5~9bp
at present) in order to prevent a sharp rise in issuance cost from the expanded application
of disclosure and registration requirements.
III. Others FSS

2.
2.Reform
Reformdisclosure
disclosurerequirements
requirementsand
andunfair
unfairtrading
tradingactivities
activities

■ The obligation of periodic disclosure of listed companies shall be withheld, when deemed
necessary, in consideration of equilibrium between investor protection and business
secrets as in the issuance registration and regular disclosure.

■ The 5% rule shall be reformed by abolishing the exemption of the central and municipal
governments and government funds from reporting.

■ Regulations on prohibition of insider trading shall be strengthened by expanding the

application 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 permitted

cross-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.
III. Others FSS

3. Reform self-regulatory system

■ Legislation of the Capital Market and Financial Investment Services Act will
inevitably 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 multiple
regulatory 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 new
consolidated act after fully taking into account the opinions from member companies
* PRO: Public-regulatory organization * SRO: Self-regulatory organization

Current Proposed
PRO SRO FICs PRO SRO FICs

Securities Dealing
KSDA company Arranging
Self Asset management
FSC KOFA
Futures FSC Regulatory
company Discretionary &
FSS FSS Organization non-discretionary
Asset investment advisory
AMAK management Asset custodian
company management
III. Others FSS

4. Date of enforcement

■ A sufficient grace period (1 year 6 months) is granted until the enforcement date after
proclamation 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 institutional

guideline into a function-based one.

▶ Market participants shall be required to adjust the current equity capital

and modify the human and material resources in order to meet the new functional
requirements 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
IV. Expected effects FSS

Emergence
Emergenceof ofadvanced
advancedinvestment
investmentbanks
banks(IBs) with
(IBs) withglobal
globalcompetitiveness
competitiveness
isisexpected
expectedthrough
throughconvergence
convergenceand
andconsolidation
consolidationininthe
thefinancial
financialindustry
industry
[1] Set up a business model in line with advanced IBs
■ Business scope: The same business scope as that of advanced IBs will be realized

Advanced IBs
<IB>
Principal Corporate Securities
investment financing services Asset management

Current
Asset Non-discretionary Discretionary
Securities Futures Management investment Trust com
Investment
com com com Advisory com advisory com

After consolidation
FICs
Non-discretionary Discretionary Asset
Dealing Arranging Asset investment investment custodian
management advisory services advisory services management

Principal Corporate Securities

investment financing services Asset management
IV. Expected effects FSS

■ Financial investment products

ex) Inverse floater

Design securities that
adopt all kinds of
derivative techniques
(Securitized derivatives)
Securities
ex) Publicly offered indirect investment
Structure collective
investment scheme by
using various CIS vehicles
ex) Mixed assets funds that can change
Establish funds not
restricted by the target
investment asset
Dual indexed notes (CMT, etc.)
Range accrual notes
CPPI based notes
Digital option embedded notes
Credit-linked notes
Fund-linked notes
CAT bonds
securities using joint stock company
under the Commercial Law, anonymous
partnership typed funds, etc.
investment vehicles freely
among stocks, bonds, real estate,
currencies, etc.

Structure derivatives ex) Derivatives whose underlying assets are

OTC
based on diverse catastrophe, crime rate, weather such as
derivatives
risks measurable precipitation, snowfall, sunlight, etc.

Exchange- Any derivatives can be ex) Futures and options related to

traded traded on the exchange environment and energy (carbon
derivatives house if properly structured emission credits, electric power)
IV. Expected effects FSS

[2] Strengthen competitiveness by structuring and offering a multitude of

new financial products

■ Competitiveness of the FICs will be raised on the back of their ability to structure
and manage all financial investment products such as corporate financing, principal
investment and asset management, as and when deemed necessary.

① IB’s Corporate Financing business

Expanded 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.

② Asset Management business

It will be possible to structure and offer a variety of custom-made securitized

derivatives, indirect investment products and derivatives.
IV. Expected effects FSS

[3] Bring regulatory reform

■ About 40% of 300 regulations concerning capital market

to be scrapped or mitigated
Under reform
Current After reform
 Scrap Ease Newly establish 
300 120 10 10 190

■ 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 asset
management company, trust company and merchant bank
▶ Obligatory registration with the Financial Supervisory Commission
by securities issuers
IV. Expected effects FSS

[4] Fortified investor protection will make more credible market

Eliminate
Eliminate loopholes
loopholes in
in Increasing level of
investor
investor protection
protection investor protection
Advanced investor protection
Comprehensive System
- Product guidance, liability for
damage, suitability
- Financial products - internal control system for
anti-conflict of interest

Functional Regulation Strengthening unfair trading

- enlarge the scope of
insider and securites for
- Same supervision for same insider regulation
functions - spot(futures
spot(futures)) inked
inked futures
futures
(spot)
(spot) market
market manipulation
manipulation reg.
reg.

Procuring informed investment based on full and fair disclosure

and effective renumeration
FSS